MNI INTERVIEW2: Ex-PBOC Advisor: Prepare For Fed Tightening

Chinese regulators should brace for possible large capital outflows when the Federal Reserve eventually indicates it will move to tighten monetary policy, a prominent policy advisor told MNI in an interview.

"Changes in the Fed's stance may rock market sentiment and disturb domestic mar-kets which are still vulnerable, and pressure emerging market currencies," said Huang Yiping, a former member of the Monetary Policy Committee at the People's Bank of China. "What worries me most is market volatility, compared with currency depreciation," he said.

China still needs some macro-prudential management of capital flows as domestic markets and the regulatory framework are still maturing, said Huang, deputy dean of National School of Development at Peking University.

Further liberalisation of the capital account should proceed cautiously as the authorities increase the flexibility of the yuan and continue to open up financial markets, he said.

"Capital account convertibility should find a balance between efficiency and stability … for some emerging economies, the option may be between capital controls and financial crisis…so capital controls are not all negative," he said.

Huang pointed to a potential Tobin tax on financial transactions as a possible future tool which could deter speculation and prevent outflows from causing a crisis. Some other policy advisors in Beijing have also told MNI a Tobin tax might be a good idea.

RECOVERY MANDATE

The priority for the PBOC is still the economic recovery and employment but the central bank will start to watch inflation, another key mandate, if growth remains satisfactory, said Huang.

China's factory gate prices jumped 4.4% y/y in March, the most since July 2018 thanks to surging commodity prices, while the consumer price index increased 0.4%. The gap between the two gauges indicates consumer demand is still weaker than supply and profits of producers in the middle of the industrial chain are being squeezed, he said.