Abstract
China has long been accused of keeping the renminbi undervalued so that its export competitiveness can be maintained (IMF, People’ Republic of China: 2004 Article IV Consultation IMF Country Report 064/351, 2004; Bergsten et al., China’s rise: challenges and opportunities, 2009). In response to the international pressures to increase flexibility in the exchange rate regime, the Chinese government introduced a new exchange rate regime in July 2005. Under this regime, the renminbi would be managed with reference to a basket of currencies rather than a single currency of the US dollar. However, the renminbi–dollar rate is kept within a narrow band by massive official interventions in foreign exchange markets and its central rate has been allowed to appreciate only gradually.
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- 1.
The DCC model is a class of multivariate generalised autoregressive conditionally heteroscedastic (GARCH) models, which not only allow the conditional variance of a variable to depend on the realised volatilities in previous periods but also allow for volatility spillovers in the sense that volatility shocks to one variable could affect the volatility of other related variables. See Enders (2010, pp. 179–180) for an accessible description of the DCC model.
- 2.
China’s current account surplus as a share of world GDP is calculated using the data from the IMF’s World Economic Outlook Database published in April 2013. The share is projected to rise from 0.30 % in 2012 to 0.66 % in 2017, which is close to the pre-crisis peak of 0.69 % in 2008.
- 3.
The Balassa–Samuelson effect is a tendency for countries with higher productivity in the traded relative to the non-traded goods sector to have more appreciated real exchange rates.
- 4.
Prior to the unification of exchange rates in January 1994, China adopted a dual exchange rate regime.
- 5.
The response of household-saving rates to changes in interest rates will depend on the relative strength of substitution and income effects. Lardy (2012) argues that the primary motivation of Chinese households to save is to achieve a target level of savings in an environment of underdeveloped social security systems. Under such circumstances, the income effect is likely to dominate the substitution effect; thus, household saving rates will increase in response to an increase in deposit rates.
- 6.
See Frankel (1999) for the discussion of impossible trinity in the context of the choice of exchange rate regimes.
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Kinkyo, T. (2014). Exchange Rate Flexibility and Economic Rebalancing in China. In: Callaghan, M., Ghate, C., Pickford, S., Rathinam, F. (eds) Global Cooperation Among G20 Countries. Springer, New Delhi. https://doi.org/10.1007/978-81-322-1659-9_9
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