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Citi: China needs to control capital outflow

CHINA'S central bank should better regulate investor expectation of a weakening yuan to control capital outflow and one option is to replace the currency basket with a more stable currency as the main reference in the short term, suggested Liu Ligang, chief China economist at Citigroup.

"It is not an effectual way anymore to manage yuan's exchange rate against a basket of currencies amid a strong dollar," Liu said in a recent media briefing in Shanghai.

"As if the yuan couldn't appreciate together with the US currency, market expectations on the yuan’s future performance will worsen and thus investors will convert money to foreign currencies to hedge the risks brought by the yuan's depreciation," Liu said.

The yuan plunged to an eight-and-a-half year low versus the dollar on the end of November. While the yuan flowing across the borders rose to an average of US$28 billion per month in the first 10 months of the year, according to a Morgan Stanley report earlier last week.

Liu said central bank's cautiousness about capital outflows and a decline of foreign exchange reserves is preferable, which refers to its newly unveiled regulatory scrutiny over high-value transactions and curbs on overseas lending for the first time.

"Besides the capital control, central bank should keep improving the exchange rate mechanism and disallow the forge of intensifying anticipation of the yuan's depreciation for the next step," Liu said.

Liu foresees yuan's rate against the dollar at 7.05 by the end of 2017, stronger than the average 7.2 level forecast by its peers.


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