Liberalizing China's foreign exchange regime

This chapter examines the way in which China has transformed itself from a highly centralized foreign exchange regime toward a more open regime with current account convertibility. The focus is on the endogenous aspect of the liberalization process. We describe the way in which the open-door policy and other reforms in China have expanded the foreign exchange rate's role in the Chinese economy and have compelled the government to remove regulatory barriers on foreign exchange transactions. We also describe the way in which reform in the foreign exchange regime fueled itself and created pressures for further reforms, especially in banking. Consistent with China's approach to economic reform, relaxation of exchange controls has proceeded incrementally, experimentally, and pragmatically-in order to minimize the number of conflicts with vested interests.