Advanced Search
MyIDEAS: Login

The Case for Stabilizing China's Exchange Rate: Setting the Stage for Fiscal Expansion

Contents:

Author Info

  • Ronald McKinnon
  • Gunther Schnabl

Abstract

China's financial conundrum arises from two sources. First, its large saving (trade) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead, foreign currency claims (largely US dollars) build up within domestic financial institutions. Second, economists, both American and Chinese, mistakenly attribute the surpluses to an undervalued RMB. To placate the USA, the result was a gradual and predictable appreciation of the RMB against the dollar of 6 percent or more per year from July 2005 to July 2008. Together with the fall in US interest rates since mid-2007, this oneway bet in the foreign exchanges markets not only attracted hot money inflows but inhibited private capital outflows from financing China's huge trade surplus. Therefore, the People's Bank of China had to intervene heavily to prevent the RMB from ratcheting upwards, and so became the country's sole international financial intermediary as official exchange reserves exploded. Because of the currency mismatch, floating the RMB is neither feasible nor desirable, and a higher RMB would not reduce China's trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal RMB/USD rate similar to that which existed between 1995 and 2004. However, for any newly reset RMB/USD rate to be credible as a monetary anchor, foreign "China bashing" to get the RMB up must end. Then the stage would be set for fiscal expansion to both stimulate the economy and reduce its trade surplus. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Institute of World Economics and Politics, Chinese Academy of Social Sciences.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1749-124X.2009.01128.x
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Institute of World Economics and Politics, Chinese Academy of Social Sciences in its journal China & World Economy.

Volume (Year): 17 (2009)
Issue (Month): 1 ()
Pages: 1-32

as in new window
Handle: RePEc:bla:chinae:v:17:y:2009:i:1:p:1-32

Contact details of provider:
Postal: No. 5 Jian Guo Men Nei Street, Beijing 100732
Phone: (0086-10) 65126105
Fax: (0086-10) 65126105
Email:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=1671-2234
More information through EDIRC

Order Information:
Web: http://www.blackwellpublishing.com/subs.asp?ref=1671-2234

Related research

Keywords:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bla:chinae:v:17:y:2009:i:1:p:1-32. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.