China’s exchange rate regime reform: Implications from the experiences of Japan, Korea and Taiwan

This paper reviews the process of exchange rate regime reform of three economies: Japan, Korea and Taiwan, with emphasis on background, policies applied, and corresponding consequence in different periods. Lessons drawn from the experiences of these three economies are important and valuable for China’s ongoing exchange rate regime reform, although some could argue that China today is different from the three countries then. We argue that the Gradualism approach is the optimal option for RMB revaluation rather than the One-off approach. Follow-up monetary and fiscal policies are needed to maintain export and economic growth when the currency is being revaluated, but the timing and scale of policies are equally important. China’s exchange rate regime reform should be regarded as an integral component of a broad financial system reform rather than considered alone. In addition, an integrated financial market reform is a pre-condition for achieving smooth exchange rate regime reform. Last but not least, the policies for long-term economic structure adjustment and industry upgrading need to be prepared by China’s authority in order to respond to the possible adverse impact of RMB exchange rate region reform on its economy.