April 27, 2017 / 9:13 AM / 3 months ago

China needs to balance capital control risks- Australia cbank gov

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SYDNEY, April 27 (Reuters) - Reserve Bank of Australia Governor Philip Lowe said on Thursday that China needs to strike a balance while tightening capital outflows as it runs counter to its longer-run goal of liberalisation.

The internationalisation of the Chinese renminbi and liberalisation of its capital account have significant implications for the global financial system, Lowe said in Sydney.

China's central bank spent billions of dollars last year to slow the yuan's decline against the surging dollar. The yuan, also know as the renminbi, hit an almost 8-1/2 year low against the greenback at one point.

Adding to the pressure, expectations of further yuan weakness and fears of a slowdown in the economy spurred investors to move their funds offshore, prompting the authorities to implement a series of measures late in the year to curb outflows.

"Short-term controls arguably can have a positive effect on financial stability in China...But there is a balance to be struck here," Lowe said in a speech about 'RMB Internationalisation.'

"One consideration is the signal that a tightening of controls, after several years of liberalisation, could send to investors about how the government perceives the balance of risks facing the economy," he added.

"Ultimately, balancing these competing risks is a difficult task."

Lowe said another challenge facing China as it looks to free up its currency is dealing with implications for the global financial system because of its sheer size as the world's second-biggest economy.

While market forces play a decisive role, the yuan is a managed floating exchange rate, according to the People's Bank of China.

The exchange rate has been a bugbear for U.S. President Donald Trump, who declared China the "grand champions" of currency manipulation.

Lowe said the world hardly paid any attention when Australia opened its capital account in the 1980s but that is not the case for China.

"The rest of the world is watching and it has a strong interest in the outcome."

Lowe added that Chinese investment has the potential to affect asset prices significantly, with housing prices in some Australian cities rising thanks in part to buyers from China. (Reporting by Swati Pandey; Editing by Kim Coghill)

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