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The Global Credit Crisis And China'S Exchange Rate



    () (Economics Department, Stanford University, Stanford, California 94305-6072, USA)


    () (Economics Department, Stanford University, Stanford, California 94305-6072, USA)


    () (Economics Department, Stanford University, Stanford, California 94305-6072, USA)


The case for stabilizing China's exchange rate against the dollar is strong. Before 2005 when the yuan/dollar rate was credibly fixed, it helped anchor China's domestic price level. But gradual RMB appreciation from July 2005 to July 2008 created a "one-way-bet" that disordered China's financial markets in two respects: (i) no private capital outflows to finance China's huge trade surplus leading to an undue build up of official exchange reserves and erosion of monetary control, and (ii) a breakdown of the forward exchange market in 2007–2008 so that exporters could no longer get trade credit — probably worsening the severe slump in Chinese exports. But after July 2008, the credit crunch induced an unexpected unwinding of the dollar carry trade leading to a sharp appreciation in the dollar's effective exchange rate. The People's Bank of China (PBC) then stopped RMB appreciation against the dollar. China's forward exchange market was restored and monetary control regained. Now the PBC can better support the fiscal stimulus by promoting a parallel expansion of bank credit.But, since March 2009, the fall in the dollar (with the RMB tied to it) again threatens to undermine the yuan/dollar rate and China's monetary stability.

Suggested Citation

  • Ronald Mckinnon & Brian Lee & Yi David Wang, 2010. "The Global Credit Crisis And China'S Exchange Rate," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 55(02), pages 253-272.
  • Handle: RePEc:wsi:serxxx:v:55:y:2010:i:02:n:s0217590810003705
    DOI: 10.1142/S0217590810003705

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    References listed on IDEAS

    1. John B. Taylor, 2009. "Getting Off Track - How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis," Books, Hoover Institution, Stanford University, number 3, December.
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    More about this item


    China's exchange rate; capital flows; trade credit; forward exchange market; carry trade; bank credit; fiscal stimulus; E62; F31; F32; F42;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission


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