Devaluation fears are hounding investors.
Chinese authorities are likely to impose tighter capital controls as pressures on its currency escalate, according to a report by Fitch.
Fitch said that capital outflows and sharp declines in official foreign reserves continue to add to currency pressures in China, leading to rising investor uncertainty and heightened fears of the risks of a much sharper yuan devaluation.
However, the report noted that a one-off devaluation is unlikely because such a move would undercut the broad economic objective of rebalancing the economy by squeezing households through higher import costs and effectively subsidising corporate profits.
Furthermore, such a devaluation could exacerbate financial market volatility in the short term, particularly among China's emerging market trading partners.
Authorities are also unlikely to raise rates as doing so will intensify stresses on heavily indebted domestic corporates and local governments, Fitch said.
“Of the main policy options available, tighter capital controls are likely to be the policy of least resistance for Chinese authorities relative to a sharp currency devaluation or hiking domestic interest rates,” Fitch said.
“There is already some anecdotal evidence that regulators are adopting a stricter approach to enforcing existing capital controls, such as the limit on personal foreignexchange use of USD50,000,” the report added.
However, Fitch stressed that tighter capital controls can only be a temporary solution, as the policy dilemma facing the Chinese authorities is a result of deeper p as investor uncertainty and heightened fears of the risks of a much sharper yuan devaluation.
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