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Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China


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  • Eswar Prasad
  • Qing Wang
  • Thomas Rumbaugh


This paper reviews the issues involved in moving towards greater exchange rate flexibility and capital account liberalization in China. A more flexible exchange rate regime would allow China to operate a more independent monetary policy, providing a useful buffer against domestic and external shocks. At the same time, weaknesses in China’s financial system suggest that capital account liberalization poses significant risks and should be a lower priority in the short term. This paper concludes that greater exchange rate flexibility is in China’s own interest and that, along with a more stable and robust financial system, it should be regarded as a prerequisite for undertaking a substantial liberalization of the capital account.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Policy Discussion Papers with number 05/1.

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Length: 32
Date of creation: 01 Jan 2005
Date of revision:
Handle: RePEc:imf:imfpdp:05/1

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Postal: International Monetary Fund, Washington, DC USA
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Keywords: Capital controls; exchange rate; capital account liberalization; exchange rate flexibility; foreign exchange; capital inflows; capital outflows; exchange rate regime; capital flows; foreign exchange market; capital account convertibility; fixed exchange rate; current exchange rate; current exchange rate regime; exchange rate regimes; capital account transactions; exchange rates; exchange rate volatility; fixed exchange rate regime; liberalization of capital; hedging; flexible exchange rate; exchange controls; exchange transactions; foreign exchange risks; foreign exchange transactions; exchange risks; exchange rate appreciation; flexible exchange rate regime; nominal exchange rate; speculative capital inflows; international capital flows; floating exchange rates; exchange markets; liberalization of capital flows; capital market; currency risk; foreign exchange controls; inflexible exchange rate regime; short-term capital inflows; speculative capital; capital markets; limited exchange rate flexibility; inflexible exchange rate; foreign capital; capital account restrictions; real exchange rate; exchange market intervention; purchase of securities; discrete adjustment in exchange rates; credit expansion; exchange rate bands; foreign exchange markets; exchange rate misalignments; exchange earnings; domestic credit; international capital; currency appreciation; volatility of inflows; forward markets; domestic capital; forward contracts; real appreciation; dollar-yen exchange rate; domestic capital markets; capital still; alternative exchange rate regime; exchange risk; foreign exchange earnings; exchange rate arrangements; exchange rate pegs; foreign investment; currency basket; exchange rate policies; exchange surrender requirements; basket of currencies; stock market; foreign exchange surrender requirements; exchange rate reform; international borrowing; foreign exchange risk; capital transactions; exchange rate pressures; alternative exchange rate; rigid exchange rate regimes; exchange rate policy; history of exchange rate; current account deficit; exchange rate need; undervalued exchange rate; unrecorded capital flows; nominal exchange rates; net capital; short-term capital; fixed exchange rate systems; exchange rate systems; subsidiaries;


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