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Adjusting China's Exchange Rate Policies

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  • Morris Goldstein

    ()
    (Institute for International Economics)

Abstract

In this paper the author argues that China's exchange rate policy is seriously flawed given its current macroeconomic circumstances and its longer-term policy objectives. The main conclusions are the following: (i) the RMB is significantly under-valued; (ii) China has been "manipulating" its currency, contrary to the IMF rules of the game; (iii) it is in China's own interest, as well as in the interest of the international community, for China to initiate an appreciation of the RMB soon; and (iv) China should neither stand pat with its existing currency regime nor opt for a freely floating RMB and completely open capital markets. Instead, China should undertake a "two step" currency reform. Step one would involve a switch from a unitary peg to the US dollar to a basket peg, a 15-25 percent appreciation of the RMB, and wider margins around the new peg. Existing controls on China's capital outflows would be either maintained or liberalized only marginally, at least in the short run. Step two, to be implemented later when China's banking system is considerably stronger than it is today, would involve a transition to a "managed float," along with a significant liberalization of China's capital outflows.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP04-1.

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Date of creation: Jun 2004
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Handle: RePEc:iie:wpaper:wp04-1

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Keywords: RMB; China; Exchange rate policies;

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References

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  1. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373.
  2. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," Research Department Publications 4026, Inter-American Development Bank, Research Department.
  3. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
  4. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
  5. Barry J. Eichengreen & Inci Ötker & A. Javier Hamann & Esteban Jadresic & R. B. Johnston & Hugh Bredenkamp & Paul R. Masson, 1998. "Exit Strategies," IMF Occasional Papers 168, International Monetary Fund.
  6. Funke, Michael & Ruhwedel, Ralf, 2001. "Export variety and export performance: empirical evidence from East Asia," Journal of Asian Economics, Elsevier, vol. 12(4), pages 493-505.
  7. Tao Ran & Ray Brooks, 2003. "China's Labor Market Performance and Challenges," IMF Working Papers 03/210, International Monetary Fund.
  8. Ronald McKinnon & Gunther Schnabl, 2003. "China: A Stabilizing or Deflationary Influence in East Asia? THe Problem of Conflict Virtue," Working Papers 232003, Hong Kong Institute for Monetary Research.
  9. Eswar Prasad, 2004. "China's Growth and Integration into the World Economy," IMF Occasional Papers 232, International Monetary Fund.
  10. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  11. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
  12. S.M. Shafaeddin, 2002. "The Impact Of China´S Accession To Wto On The Exports Of Developing Countries," UNCTAD Discussion Papers 160, United Nations Conference on Trade and Development.
  13. repec:fth:inadeb:318 is not listed on IDEAS
  14. Muscatelli, Vito Antonio & Stevenson, Andrew A & Montagna, Catia, 1995. "Modeling Aggregate Manufactured Exports for Some Asian Newly Industrialized Economies," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 147-55, February.
  15. Morris Goldstein, 1998. "The Asian Financial Crisis," Policy Briefs PB98-1, Peterson Institute for International Economics.
  16. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
  17. Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269, Octomber.
  18. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346.
  19. Turner, Philip, 1988. "Savings and investment, exchange rates, and international imbalances: A comparison of the United States, Japan, and Germany," Journal of the Japanese and International Economies, Elsevier, vol. 2(3), pages 259-285, September.
  20. Marcus Noland, 1996. "US-China Economic Relations," Working Paper Series WP96-6, Peterson Institute for International Economics.
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