By David Lawder

WASHINGTON (Reuters] – China’s yuan must be able to convert to other currencies and have free capital markets, as the International Monetary Fund’s No. On Tuesday, 2 officials stated the following.

Gita Gopinath (IMF First Deputy Manager Managing Director), spoke at an event hosted by the Peterson Institute for International Economics about the new institutional views on capital flow. She said that history shows that many reserve currencies used in international trade transactions such as the US dollar and British pound do not face capital restrictions like China.

Gopinath stated that if a country wants its currency to be global, it would need, in order to do so, to have basically freely mobile capital and full capital account liberization. Also, to convert the exchange rate to Chinese dollars, which was not possible right now.

The IMF’s institutional guidance regarding capital controls was updated on March 30, by the IMF. It now allows the application of pre-emptive steps to lessen the possibility of financial crises and deep recessions.

The new guidelines allow countries to impose measures that counter the gradual accumulation of foreign currency debt without waiting for capital flows to materialize.

Gopinath suggested that countries with fixed exchange rates may have greater incentive to use capital flow mitigation measures in order to prevent capital outflows.

She cautioned that capital flow measures should not be used to attain certain policy objectives. Domestic tools are more effective, for example controlling an increase in housing prices.

She said that while housing prices rises can sometimes be attributed to foreign buyers coming in large numbers, they are usually caused by other factors such as low interest rates or lack of housing stock.

She stated that the IMF is “skeptical about” capital inflow control to discourage foreign property investors.

Gopinath stated that this is what we should think about.

Countries should not use capital flow measures to combat unsustainable fiscal policies or influence the exchange rate of a country for their competitive advantage.

Gopinath stated, “It is not about you manipulating your exchange rate in order to keep it low for competitiveness purposes.”