Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China
Author | : Mr.Eswar Prasad |
Publisher | : International Monetary Fund |
Total Pages | : 32 |
Release | : 2005-01-01 |
ISBN-10 | : 9781451975451 |
ISBN-13 | : 1451975457 |
Rating | : 4/5 (51 Downloads) |
Book excerpt: 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.