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

By Eswar S Prasad, Qing Wang, Thomas Rumbaugh

January 1, 2005

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Eswar S Prasad, Qing Wang, and Thomas Rumbaugh. Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China, (USA: International Monetary Fund, 2005) accessed November 23, 2024

Disclaimer: This Policy Dicussion Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Capital account, Capital account liberalization, Capital controls, Exchange rate arrangements, Exchange rate flexibility, Foreign exchange

Keywords: Capital account, Capital account control, Capital account liberalization, Capital account restriction, Capital controls, Capital controls in China, China, Controls in China, Exchange rate, Exchange rate appreciation, Exchange rate arrangements, Exchange rate flexibility, Exchange rate flexibility debate, Exchange rate regime, Exchange rate volatility, Financial sector reforms, Foreign currency, Global, Nominal exchange rate, PDP, Rigid exchange rate regime, Transmission mechanism, Undervalued exchange rate

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Policy Discussion Paper No. 2005/001
Stock No:

PPIEA2005001
ISBN:

9781451975451
ISSN:

1564-5193

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