Abstract
Section 2 explores a number of aspects of the debate about China’s exchange rate policy. The focus is not to recommend specific policies but to expose a number of false arguments that have been made in the debate in order to separate out the serious considerations on which discussions should be based. While we argue that the adoption of a floating rate is not a panacea, we suggest that exchange rate adjustments can play a productive role as part of a coordinated policy strategy.
Section 3 deals with the effects of the large payments surpluses and international capital flows on China. We find that the People’s Bank of China (PBOC) has been able to successfully sterilize most of the effects of the payments surpluses on the domestic money supply so that these have not been a major cause of inflation. Speculation on currency appreciation has not been as disruptive as some expected, and international capital flows have not been a major cause of the rise and fall of China’s stock market. Thus, while China has become a major force in the global economy, it has managed to maintain considerable domestic monetary and financial autonomy.
*An early version of section 2 was presented at the Conference on Global Imbalances cosponsored by the Central University of Economics and Finance and the People’s Bank of China in Beijing, October 2006. Valuable comments from a number of participants are gratefully acknowledged. A revision was published in Chinese in The Chinese Banker, 2007. The discussion has been substantially reorganized and updated for this paper.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsNotes
- 1.
Studies have, however, found that exchange rate expectations affect the price differentials of Chinese stocks denominated in different currencies. See, for example, Burdekin (2008).
- 2.
For a more optimistic view of the sustainable size of capital inflows and hence US current account deficits see Cooper (2005).
- 3.
A number of useful papers on global imbalances were presented at the following conferences: “Revived Bretton Woods System: A New Paradigm for Asian Development?” held at the Federal Reserve Bank of San Francisco on February 4, 2005, under the joint sponsorship of the Bank's Center for Pacific Basin Studies and the University of California at Berkeley's Clausen Center for International Economics (details available at http://www.frbsf.org/economics/conferences/0502/); and “Global Imbalances and Asian Financial Markets” held at University of California, Berkeley, September 29–30, 2005. (details available at http://elsa.berkeley.edu/users/eichengr/af/agenda.html).
- 4.
For a valuable review of recent studies and their methodologies see Cline and Williamson (2008).
- 5.
For a detailed analysis of the US Treasury’s reports on China see Frankel and Wei (2007).
- 6.
The evidence of a large amount of short-term speculative capital inflows into China could be found from the increase in the current transfer, security investment, and the error and omissions (Zhang, 2005).
- 7.
Forty six QFII investors with a total US$9.5 billion got approved from the China Securities Regulatory Commission by early 2007.
- 8.
Broadly defined net domestic assets (NDAs) equals monetary base (MB) minus net foreign assets (NFAs).
- 9.
He et al. (2005) outline some of the improvements/changes made by the PBC in its conduct of OMOs in 2003–2004.
- 10.
In addition, commercial banks have been allowed a greater degree of autonomy in deciding medium and long-term CNY loan interest rates.
- 11.
Refer to Terada-Hagiwara (2004) and China’s Annual Monetary Policy Report in 2004.
- 12.
See Bird and Willett (2007). For a strong critique of the IMF’s performance, see Mussa (2008).
- 13.
See “China’s trade surplus shrinks by 20%” Financial Times, July 11, 2008, p. 4.
References
Bird, G. and T. D. Willett. (Oct.–Dec. 2007). “Multilateral Surveillance: Is the IMF Shooting for the Stars?” World Economy, 8(4), 167–89.
Burdekin, R. C. K. (2008). China’s Monetary Challenges: Past Experiences and Future Prospects. New York: Cambridge University Press.
Burdekin R. C. K. and P. L. Siklos. (2008). “What has Driven Chinese Monetary Policy Since 1990? Investigating the People’s Bank of China Policy Rule,” Journal of International Money and Finance, 27(5), 847–59.
Cavoli, T. and R. S. Rajan. (2006). “The Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization,” Asian Economic Journal, 20(4), 409–23.
Cheung, Y., C. Menzie, and F. Eiji. (Sept. 2007). “The Overvaluation of the Renminbi’s Undervaluation,” Journal of International Money and Finance 26(5), 762–785. Also NBER Working Paper No. 12850.
Cline, W. R. and J. Williamson. (2008). “Estimates of the Equilibrium Exchange Rate of the Renminbi”. In M. Goldstein and N. Lardy (eds.), Debating China’s Exchange Rate Policy, pp. 131–154. Washington, DC: Peterson Institute for International Economics.
Cooper, R. N. (2005). “Living with Global Imbalances: A Contrarian View”. Policy Briefs in International Economics. Institute for International Economics.
Dooley, M. P., D. Folkerts-Landau, and P. Garber. (2004). “The Revised Bretton Woods System,” International Journal of Finance and Economics, 9(4), 307–313.
Eichengreen, B. (2004). “Global Imbalances and the Lessons of Bretton Woods,” NBER Working Paper No. 10497.
Frankel, J. A. and S. Wei. (2007). “Assessing China’s Exchange Rate Regime,” NBER Working Paper No. 13100.
Goldstein M. and N. Lardy (eds.). (2008). Debating China’s Exchange Rate Policy. Washington, DC: Peterson Institute for International Economics.
He, D., C. Chu, C. Shu, and A. Wong. (2005). “Monetary Management in Mainland China in the Face of Large Capital Inflows,” Research Memorandum 07/2005, Hong Kong Monetary Authority (HKMA), April.
Holland, T. and D. Lague (2004). “Wasteful Transfusion”, Far Eastern Economic Review, January 22, pp. 26–29.
Hu, F. (2004). “Capital Flows, Overheating, and Nominal Exchange Rate Regime in China,” mimeo, Goldman Sachs.
Kim, S., S. H. Kim, and Y. Wang (Nov. 2004). “Macroeconomic Effects of Capital Account Liberalization: The Case of Korea,” Review of Development Economics, 8(4), 624–39.
Ma, G. (2006). “Who Pays China’s Restructuring Bill?” Working Paper No.2006-04, CEPII.
McKinnon, R. and G. Schnabl (2003). “China: A Stabilizing or Deflationary Inflation in East Asia? The Problem of Conflicted Virtue,” Working Paper No. 23, Hong Kong Institute for Monetary Research.
McKinnon, R. and G. Schnabl (2004). “The Return to Soft Dollar Pegging in East Asia: Mitigating Conflicted Virtue,” International Finance, 7, 169–201.
Moreno, R. (2001). “Pegging and Macroeconomic Performance in East Asia”, ASEAN Economic Bulletin, April.
Mussa, M. (2008). “IMF Surveillance over China’s Exchange Rate Policy”. In M. Goldstein and N. Lardy (eds.), Debating China’s Exchange Rate Policy, pp. 279–335. Washington, DC: Peterson Institute for International Economics.
Ouyang, Y. A., R. S. Rajan, and T. D. Willett. (2007). “China as a Reserve Sink: The Evidence from Offset and Sterilization Coefficients” mimeo.
Prasad, E. and S. Wei. (2005). “The Chinese Approach to International Capital Flows: Patterns and Possible Explanations,” NBER Working Paper No. 11306.
Rose, A. (2006). “A Stable International Monetary System Emerges: Bretton Woods, Reversed,” Paper presented at a conference on Financial and Commercial Integration, UC Santa Cruz, September 29–30. (http://sccie.ucsc.edu/webpages/JIMF-agenda.html)
Terada-Hagiwara, A. (2004). “Reserve Accumulation, Sterilization, and Policy Dilemma,” ERD Policy Brief Series No. 31, Asian Development Bank.
Tornell, A. and A. Velasco (2000), “Fixed Versus Flexible Exchange Rate Regimes: Which Provides More Fiscal Discipline,” Journal of Monetary Economics, 45, 399–436.
Willett, T. (1998). “The Credibility and Discipline Effects of Exchange Rates as Nominal Anchors”, The World Economy, 21, 303–26.
Willett, T. D., Ekniti Nitithanprapas, Isiriya Nitithanprapas, and Sunil Rongala. (2004). “The Asian Crises Reexamined”. Asian Economic Papers, 3(3), 32–87
Xin, Z. (2007). “Inflows of Hot Money to be Curbed,” China Daily, June 27. http://www.chinadaily.com.cn/china/2007-06/27/content_903359.htm
Zhang, L. (2005). “China’s External Imbalance: Diagnosis and Prescription”, mimeo (May).
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2009 Springer Science+Business Media, LLC
About this chapter
Cite this chapter
Liang, P., Ouyang, A., Willett, T.D. (2009). The RMB Debate and International Influences on China’s Money and Financial Markets* . In: Barth, J., Tatom, J., Yago, G. (eds) China’s Emerging Financial Markets. The Milken Institute Series on Financial Innovation and Economic Growth, vol 8. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-93769-4_6
Download citation
DOI: https://doi.org/10.1007/978-0-387-93769-4_6
Published:
Publisher Name: Springer, Boston, MA
Print ISBN: 978-0-387-93768-7
Online ISBN: 978-0-387-93769-4
eBook Packages: Business and EconomicsEconomics and Finance (R0)