In yet another sign of the strange times we live in, Japan is calling for China to impose controls to stem capital outflows that are eroding the value of the renminbi. Authoritative voices have endorsed this view. This fast-developing orthodoxy that capital controls could give China some breathing room is wrong. Controls would make things worse, not better.

China certainly has a problem on its hands. In August 2015, the People’s Bank of China ostensibly freed the renminbi’s value to be more freely determined by market forces. Unfortunately, it got off on the wrong foot, combining a well-intentioned move towards greater exchange rate flexibility with a 2 per cent devaluation relative to the dollar. Financial markets focused on the devaluation, interpreting it as a desperate measure to shore up a stalling economy. The problem was compounded by botched communications.

Since August, China has lost about $320bn of foreign exchange reserves in trying to prevent its currency from falling too fast. This has intensified a trend of reserve losses since mid-2015 as restrictions on outflows have been eased, allowing households, corporations and institutional investors to seek portfolio diversification through investments abroad.