• Davos delegates predict China will avoid hard landing
  • Lagarde says massive use of reserves not a good idea

Bank of Japan Governor Haruhiko Kuroda said China should impose capital controls to defend the yuan rather than keep burning through currency reserves.

As he and other international policy makers expressed confidence that the world’s second largest economy will avoid a hard landing, Kuroda made his proposal on the final day of the World Economic Forum’s annual meeting in Davos, Switzerland.

Haruhiko Kuroda
Haruhiko Kuroda
Photographer: Matthew Lloyd/Bloomberg

China is struggling to hold up the yuan as a slowing economy forces it to loosen monetary policy and prompts capital to flee. It now faces questions from investors over just how long it can keep deploying reserves to calm the yuan’s volatility.

“This is my personal view, and it may not be shared by the Chinese authorities, but in this kind of somewhat contradictory situation capital controls could be useful to manage the exchange rate as regards domestic monetary policy in a consistent and appropriate way,” Kuroda said on Saturday.

Deploying Reserves

China is burning through its reserves as it tries to prop up the currency. China’s stockpile plunged $513 billion last year to $3.33 trillion, the first annual decline since 1992 and the holdings will drop to $3 trillion or less by the end of this year, according to the median of 12 forecasts in a Bloomberg News survey this month. They were projected to tumble further, to $2.66 trillion by the end of next year.

“The massive use of reserves would not be a particularly good idea,” said International Monetary Fund Managing Director Christine Lagarde, who suggested China better clarify how it manages the yuan.

China has already tightened some capital controls, requiring lenders in offshore yuan-trading centers to lock away more funds in their latest efforts to combat capital outflows.
It also suspended some foreign lenders from conducting some cross-border yuan operations and cracked down on illegal money transfers.

Market Jitters

China’s economic slowdown -- and the subsequent financial turmoil it helped to spark --- were among the most-discussed topics in Davos this week. For all the market jitters, most delegates bet that the economy will soon stabilize as officials pivot from debt-fueled investment and exports toward consumption and services.

“We’re not seeing a hard landing,” said Lagarde. “We’re seeing an evolution, a big transition which is going to be bumpy, which will offer some turbulence.”

U.K. Chancellor of the Exchequer George Osborne said that even at the current growth rate, China would add the equivalent of Germany to global output by the end of this decade.

“We actually believe that China will have a soft landing,” said Credit Suisse Group AG Chief Executive Officer Tidjane Thiam.

More broadly, Thiam said global banks are in a much stronger position now and praised the work of regulators in forcing them to strengthen their balance sheets. He also said it’s high time that the U.S. Federal Reserve raised rates even though it means that global monetary policy is now going out of sync.

“A normalization is necessary because I don’t like periods where the price of risk is distorted for a long period of time,” said Thiam.

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