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Currency Concerns under Uncertainty: The Case of China

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  • Sunanda Sen

Abstract

The recent declines in China's financial account balance ended the "twin surplus" era and led to a modest decline in the stock of official reserves, which reflects a reversal in expectations for the Chinese currency. Negative balances, which have been visible in China's financial balances since the last quarter of 2011, have heightened fears/anxiety in markets. These deficits stand in sharp contrast to the typical financial account surplus that existed until 2010. The announcement in September 2011 by Chinese monetary authorities of a "two-way floating" RMB in the foreign exchange market has unsettled market expectations and has led to a sharp fall in the financial balance. The latter brought a change in the expectations regarding the RMB-USD exchange rate. This change was reflected in the drop in foreign exchange assets, which was caused by a jump in short-term trade credits to prepay (for imports) in dollars, a rise in dollar advances from banks, and a withdrawal of dollar deposits. These changes have, of late, been a cause of concern relating to the future of China's economic relations vis-a-vis trading and financial partners, which include the United States. The experience of China, in a changing world beset with deregulation and with speculation affecting her external balance in recent years, provides further confirmation of John Maynard Keynes's observation, in 1937, regarding uncertainty in markets: "About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know."

Suggested Citation

  • Sunanda Sen, 2013. "Currency Concerns under Uncertainty: The Case of China," Economics Working Paper Archive wp_761, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_761
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    File URL: http://www.levyinstitute.org/pubs/wp_761.pdf
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    Cited by:

    1. Amiya Kumar Bagchi, 2015. "The Arithmetic of Resource-intensive Growth, Keynesian Monetary Management, and Egalitarian Green Growth," Development and Change, International Institute of Social Studies, vol. 46(5), pages 1201-1212, September.

    More about this item

    Keywords

    China; Financial Balances; Official Reserves; Twin Surpluses; Rebalancing; Expectations; Internationalization; Managed Exchange Rate;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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