Abstract
Based on a simple theoretical exchange rate model, this paper shows how persistent balance of payments surpluses build up appreciation pressure on a fixed exchange regime in a partially open economy such as China. A deregulated market interest rate may work as an automatic stabilizer to release some of the appreciation pressures, but it cannot fully eliminate the appreciation pressure because of the zero interest rate floor. Strategic options for the government include: Improving the quality of domestic assets by reducing the non-performing loans of the banking sector, so that the substitutability of domestic and foreign assets will rise and the exchange rate will be stabilized. Secondly, more foreign currency loans may be issued through the state-owned banking sector to promote economic growth and increase income while at the same time reducing the level of foreign reserves.
| Original language | English |
|---|---|
| Pages (from-to) | 103-117 |
| Number of pages | 15 |
| Journal | China Economic Review |
| Volume | 16 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 1 Jan 2005 |
Bibliographical note
We are grateful for useful suggestions and comments from Elliott Parker, the co-editor, Wang Linsheng, Douglas Young, Yingqi Wei, two anonymous referees, and participants of the Canadian Economic Association's 38th Annual Meetings, Ryerson University, Toronto, June 4–6, 2004.Funding
This research was supported in part by a Competitive Earmarked Research Grant (No. LU3110/03H) from the RGC of Hong Kong SAR Government, a research grant from Lingnan University, Hong Kong (No. DR04B4), and research support from Macroeconomic Research Centre, Xiamen University, China, and a research grant of the 211 University Advancement Project entitled “China's sustainable development under the WTO”, sponsored by the Education Ministry of P.R. China. However, we are responsible for any remaining errors.
Keywords
- China
- Exchange rate model
- Government intervention
- Revaluation pressure
