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00:00CHART WHICH JOE HAS PULLED UP, SHOWING HOW CAPITAL OUTFLOWS FROM CHINA HAVE ACCELERATED IN RECENT MONTHS, THE WHITE BARS, AS THE YEN S SUFFERED LOSSES. JOE: WHAT DOES CHINA DO HERE? BLOOMBERG REPORTING THE GOVERNMENT WANTING TO IMPLEMENT MORE CONTROLS TO STEM OUTFLOWS AND SHORE UP THE CURRENCY. CAN IT WORK? > > POSSIBLY. IN SOME SENSE IT IS ACTUALLY GETTING -- YOU DON'T INTRODUCE ANTI-CAN CAPITAL CONTROLS UNLESS THERE IS SERIOUS PRESSURE. THE MAINTENANCE OF A BASKET BAG AGAINST A BROAD SET OF CURRENCIES AT A TIME WHEN THE DOLLAR STRENGTHENED MEANS THE YUAN WEAKEN SIGNIFICANTLY, THAT AND THE POSSIBLE REACTION TO TRUMP POLICY CHANGES, HAS CREATED EXPECTATIONS OF FURTHER DEPRECIATION. THE GOVERNMENT LOOKS TO BE FIGHTING THOSE ARE EXPECTATIONS AND HAS MEANINGFULLY TIGHTEN CONTROLS. ALL THE MEASURES SINCE NOVEMBER INDICATE THE GOVERNMENT IS SERIOUS, NOT GOING TO ALLOW STATE COMPANIES TO GAME THE SYSTEM, THAT WELL-CONNECTED CHINESE COMPANIES CAN'T CHANNEL CAN'T MONEY OUT THROUGH FOREIGN DIRECT INVESTMENT AND THE LIKE, WHICH ON ONE LEVEL SUGGESTS A PROBLEM, AND ON ANOTHER LEVEL SUGGESTS THE GOVERNMENT IS PUTTING ITS FULL ARSENAL TO BEAR ON THE ISSUE. SCARLET: HOW MUCH HELP IT STATE OWNED ENTERPRISES SELLING DOLLARS AND EUROS PROVIDE? > > LET'S THINK OF IT AS ALL CHINESE FIRMS. IN AGGREGATE, CHINA RUNS A MEANINGFUL TRADE SURPLUS, SO THE ECONOMY IS GENERATING MORE DOLLARS THROUGH IMPORTS, SO THERE IS AN UNDERLYING SOURCE OF SUPPORT IF THESE COMPANIES CAN BE PERSUADED, FORCE, COURSE, TO SELL THEIR DOLLARS. ON THE OTHER HAND, THERE IS STRONG DEMAND ON THE PART OF CHINESE SAVERS TO MOVE THEIR MONEY OUT OF CHINA, PARTICULARLY GIVEN THE EXPECTATIONS OF FURTHER DEPRECIATION, SO A BATTLE BETWEEN THE UNDERLYING SUPPORT FROM THE TRADE ACCOUNT AND THE UNDERLYING PRESSURE FROM THE FINANCIAL ACCOUNT. JOE: I WANT TO GO BACK TO THE BASKET, CHINA, THE YUAN TARGETED AGAINST THIS BASKET, IS THIS MEANINGFUL? AS WE TALK ABOUT WEAKENING COME A WEAKENING EVERY DAY, YES, IT IS STABLE, BUT DO PEOPLE PAY ATTENTION TO THE BASKET? > > LOOK, THE MARKET PAYS ATTENTION TO THE BASKET BECAUSE THE FACT THAT THE CURRENCY HAS BEEN STABLE AGAINST THE BASKET HAS MEANT YOU HAVE NOT MADE AS MUCH MONEY BETTING ON THE CHINESE YUAN AS YOU WOULD HAVE ON THE YEN, SO FROM THE POINT OF VIEW OF AN OFFSHORE CURRENCY TRADER, THE FACT THAT THE YUAN IS BEING MANAGED MATTERS. IN THE POINT OF VIEW OF A CHINESE CITIZEN, THEY STILL SEEM TO HAVE EXPECTATIONS SHAPED BY MOVES IN THE YUAN AGAINST THE DOLLAR, SO IN THAT SENSE THE STORY BESIDES THE OUTFLOWS IS THAT THE ECONOMIC DATA LOOKS DECENT, ENDING THE YEAR ON A STRONG PMI. IS THIS SUSTAINABLE? IT FEELS LIKE TENSION, THE UNDERLYING WEAKNESS IN THE CAPITAL SITUATION, BUT THE ECONOMY NOT DOING SO BADLY SEEMS TO BE HOLDING ITS OWN, HOW DOES THIS RESOLVE ITSELF? > > THAT IN SOME SENSE IS THE PARADOX IF YOU COMPARE WHERE WE ARE NOW TO A YEAR AGO, THE ECONOMY IS STRONGER. THERE IS LESS CONCERN ABOUT THE CURRENCY, BUT CURRENCY CONCERNS HAVE MOUNTED BECAUSE THE MOVE AGAINST THE DOLLAR EVEN AS THE ECONOMY LOOKS STRONGER. CAN IT LAST IN THE SHORT RUN? SURE. THE ECONOMY STRENGTHEN BECAUSE OF A POLICY STIMULUS. AS LONG AS THAT STIMULUS IS MAINTAINED, CHINA CAN MAINTAIN DECENT GROWTH. DOES THIS COME WITH RISKS? ABSOLUTELY. WHAT IS THE ULTIMATE WAY OUT? MY VIEW IS SIMPLE, YOU NEED TO SHIFT THE BASIS OF GROWTH MUCH MORE STRONGLY TOWARDS CONSUMPTION, SO YOU DON'T HAVE AN UNDERLYING RELIANCE ON CREDIT TO SUPPORT A HIGH LEVEL OF INVESTMENT OR NEED TO RELY ON EXPORTS. SCARLET: WE HAVE SEEN CHINA'S HOLDINGS OF TREASURY DECLINED STEADILY, NOW AT A SIX YEAR LOW, SO CHINA IS LOOKING FORWARD TO THIS YEAR, MAY BE A BIG SELLER OF TREASURIES ONCE AGAIN TO HELP KEEP THE YUAN STABLE. HOW BIG OF A FACTOR WILL THAT BE? WHERE IS THE ROOM FOR SURPRISE THERE? > > CHINA HAS BEEN SELLING TREASURIES, ALTHOUGH IT DOES NOT ALWAYS SHOW UP IN THE DATA, THERE ARE TECHNICAL COMPLEXITIES , SINCE THE FALL OF 2015, SINCE THE SURPRISED EVALUATION. THERE HAVE BEEN FALLS AND RESERVES, DOWN BY ABOUT A TRILLION. IT IS COMMENSURATE WITH THE FALL AND RESERVES. I DON'T THINK THERE IS HIT IN NEWS OR ANY PARTICULAR SURPRISE. WILL THIS CONTINUE? YES. IF RESERVES GO DOWN, CHINA WILL SELL TREASURIES. THE IMPORTANT THING FROM THE BROADER VIEW OF THE BOND MARKET IS THAT WHEN CHINA WAS SELLING WHEN THE BOND MARKET RALLIED IN THE MIDDLE OF LAST YEAR, CHINA HAS BEEN SELLING AS THE BOND MARKET SOLD OFF. CHINA HAS NOT BEEN THE OVERWHELMING DRIVER OF THE BOND MARKET. IT HAS BEEN FED, EXPECTATIONS, BOJ, ECB, AND THE UNDERLYING REALITY THAT WITHOUT FED PURCHASES THAT THERE IS NOT A

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Setser on China's Capital Controls, Curbing Outflows

Council on Foreign Relations' Brad Setser discusses what's behind capital outflows from China and his outlook for the economy. He speaks on "What'd You Miss?" (Source: Bloomberg)

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