Reserve Bank of Australia governor Philip Lowe has backed China's refusal to fully liberalise the flow of capital in and out of its economy as a short-term way of managing the huge disruptions caused by the rapid emergence of the renminbi as a global reserve currency on par with the US dollar.
However, Dr Lowe warned that controls can only ever be a temporary fix as the RMB's internationalisation becomes one of the "biggest forces shaping the global financial system over the next decade or so".
"As the RMB becomes a truly global currency it is likely to change the way the Chinese economy operates," he told a function in Sydney on Thursday.
Since 2014, China's currency has depreciated against the US, after several years of strong appreciation, with many Chinese citizens taking advantage of liberalisation to purchase more foreign assets.
"The Chinese authorities are understandably concerned that, left unchecked, the turnaround in capital flows could be destabilising," Dr Lowe said.
"As a result, there has been some tightening up in the ability of Chinese residents to purchase foreign assets."
Dr Lowe said available data and reports from China suggest these restraints have slowed the outflow of capital.
He said it wasn't surprising that Chinese authorities were moving cautiously on capital controls.
"While many countries have liberalised their capital account and made their exchange rate more flexible, few, if any, have done so without causing at least some disruption to their domestic financial system."
"Short-term controls arguably can have a positive effect on financial stability in China by reducing the risk of a disorderly currency adjustment and pressures in Chinese financial markets.
"But there is a balance to be struck here, as tightening up controls runs counter to the longer-run goal."
Dr Lowe cautioned that too many restraints could also result in too much capital sloshing around within China, potentially causing problems including inflation.
Unlike Australia when it floated its currency and removed capital controls, which the rest of world barely noted, China's emergence will have major implications for the global financial system.
If China's total capital flows were similar to most countries – around 5 per cent of gross domestic product – it would account for more than one-fifth of global portfolio flows.
Dr Lowe noted that China's size was already affecting prices of many assets around the world.
"We have already seen some signs of this with, for example, housing prices in some cities being affected by the inflow of Chinese money."
"Managed well, this transition can be a win-win for both China and the rest of the world."
