June 24, 2014 / 10:41 AM / 5 years ago

A flexible yuan can help China cope with bigger capital flows: central bank

A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, April 3, 2014. Picture taken April 3, 2014.

BEIJING (Reuters) - China needs to make the yuan more flexible to cope with possible rises in capital flows, a senior researcher at the People’s Bank of China (PBOC) said on Tuesday.

Ma Jun, the chief economist at the central bank’s research bureau, told a forum that China’s net capital flows may not be as big as some expect once the country frees its closed capital account.

However, he said capital inflows into China’s bond market could increase as domestic bond yields are higher relative to overseas markets. This provides an arbitrage opportunity for investors compared with the yuan, which has limited scope to move.

Ma also said that as China’s capital account is already partially open, there could be “a substantial increase” in outbound foreign direct investment (FDI) if China further loosens its grip on capital flows.

“China needs to further increase the yuan’s flexibility,” said Ma, a former chief China economist at Deutsche Bank who joined the PBOC in April. Even though China in theory has a closed capital account, speculators can still sneak their cash into the world’s second-largest economy through a variety of channels, such as disguising their money as export revenue.

Persistent weakness in the yuan CNY=CFXS early this has led some analysts to conclude that Chinese authorities were attempting to reduce hot money inflows by engineering a fall in the currency to rattle speculators.

As part of its ambitions to turn the yuan into a global currency, China plans to free up its capital account though authorities have said some restrictions will be kept in place.

Reporting by Kevin Yao; Editing by Richard Borsuk

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