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

Author

Listed:
  • Eswar S Prasad
  • Qing Wang
  • Thomas Rumbaugh

Abstract

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.

Suggested Citation

  • Eswar S Prasad & Qing Wang & Thomas Rumbaugh, 2005. "Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China," IMF Policy Discussion Papers 05/1, International Monetary Fund.
  • Handle: RePEc:imf:imfpdp:05/1
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