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Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China
Author:
Mr. Eswar S Prasad
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,
Mr. Qing Wang
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, and
Mr. Thomas Rumbaugh
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Series:
IMF Policy Discussion Papers
Volume/Issue:
Volume 2005: Issue 001
Language:
English
Publication Date:
01 Jan 2005
DOI:
https://doi.org/10.5089/9781451975451.003
ISBN:
9781451975451
ISSN:
1564-5193
Pages:
32
Keywords:
PDP; exchange rate; nominal exchange rate; China; Capital controls; exchange rate regime; financial sector reforms; foreign currency; exchange rate appreciation; exchange rate volatility; transmission mechanism; controls in China; capital account control; exchange rate flexibility debate; rigid exchange rate regime; capital account restriction; undervalued exchange rate; capital controls in China; Exchange rate flexibility; Exchange rate arrangements; Capital account liberalization; Capital account; Global
Legal-disclaimer:
This Policy Discussion Paper should not be reported as representing the views of the IMF. The views expressed in this Policy Discussion Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Policy Discussion Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
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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.
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Cover IMF Policy Discussion Papers
IMF Policy Discussion Papers
ISSN:
1564-5193
Publisher:
International Monetary Fund