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Hot Money Inflows and Renminbi Revaluation Pressure

Author

Listed:
  • Yue Ma
  • Huayu Sun

Abstract

Despite a series of revaluations, which started in July 2005, hot money has been sporadically sneaking into China in anticipation of further revaluations of the renminbi. In this paper we build a monetary model to show how anticipated revaluations lead to the instability of a pegged exchange rate regime. This model assumes current account convertibility and some degree of capital control, and fundamentally sound domestic policies and economy, as is the case in China. The model demonstrates that market-oriented interest rates can act as an automatic stabilizer to ease revaluation pressures, but cannot resolve them completely because the nominal interest rate has a zero nominal bound. Therefore, the official parity is difficult to defend and the revaluation expectations can be self-fulfilling, in the absence of external intervention. The empirical results of Granger causality tests are consistent with the main findings of our theoretical model. There are a number of policy intervention measures that can extend the life of a pegged exchange rate regime.

Suggested Citation

  • Yue Ma & Huayu Sun, 2007. "Hot Money Inflows and Renminbi Revaluation Pressure," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 5(1), pages 19-36.
  • Handle: RePEc:taf:jocebs:v:5:y:2007:i:1:p:19-36 DOI: 10.1080/14765280601109220
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    References listed on IDEAS

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    1. Lawrence J. Lau & Yingyi Qian & Gerard Roland, 2000. "Reform without Losers: An Interpretation of China's Dual-Track Approach to Transition," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 120-143, February.
    2. Andrea Goldstein, 2002. "The political economy of high-tech industries in developing countries: aerospace in Brazil, Indonesia and South Africa," Cambridge Journal of Economics, Oxford University Press, vol. 26(4), pages 521-538, July.
    3. Nolan, Peter & Zhang, Jin, 2003. "Globalization Challenge for Large Firms from Developing Countries:: China's Oil and Aerospace Industries," European Management Journal, Elsevier, pages 285-299.
    4. Frankenstein John, 1999. "China's Defense Industries: A New Course?," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 5(1), pages 1-44, January.
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    Citations

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    Cited by:

    1. James Galbraith & Sara Hsu & Wenjie Zhang, 2009. "Beijing Bubble, Beijing Bust: Inequality, Trade, and Capital Inflow into China," Journal of Current Chinese Affairs - China aktuell, Institute of Asian Studies, GIGA German Institute of Global and Area Studies, Hamburg, vol. 38(2), pages 3-26.
    2. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.
    3. Shaghil Ahmed, 2009. "Are Chinese exports sensitive to changes in the exchange rate?," International Finance Discussion Papers 987, Board of Governors of the Federal Reserve System (U.S.).
    4. Tao Cai & Vinh Q. T. Dang & Jennifer T. Lai, 2015. "China's Capital and "Hot" Money Flows: An Empirical Investigation," Working Papers 162015, Hong Kong Institute for Monetary Research.
    5. Tao Cai & Vinh Q. T. Dang & Jennifer T. Lai, 2016. "China's Capital and ‘Hot’ Money Flows: An Empirical Investigation," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 276-294, August.

    More about this item

    Keywords

    JEL C LASSIFICATION : E58; F31;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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