The Future of China's Exchange Rate Policy
The Institute released its latest study The Future of China's Exchange Rate Policy by Senior Fellows Morris Goldstein and Nicholas R. Lardy at an event held July 21, 2009. The authors assess the evolution of China's current account position into by far the largest surplus in the world, the country's efforts to achieve constructive adjustment through both currency and broader economic policy initiatives, and the implications for the world economy. The release of this book takes place just before the first meeting of the new Strategic and Economic Dialogue between China and the United States.
The Future of China's Exchange Rate Policy is the capstone volume of five years of research by Goldstein and Lardy on the topic. The Institute has released a series of their papers over this period, most recently Debating China's Exchange Rate Policy in April 2008. The new study concludes that important progress has been made, with substantial appreciation of the renminbi and some reduction in China's external imbalance as a share of its economy, but that much more remains to be done to resolve this significant threat to global stability.
The authors recommend that China should eschew competitive devaluation to deal with reduced external demand; indeed during the global slowdown they should continue to appreciate the renminbi, although perhaps at a slower pace than in 2008, and avoid export promotion measures, even when they are technically consistent with China's WTO obligations. When the global economy begins to recover, the Chinese authorities should increase the pace of appreciation, with the goal of substantially reducing within three to four years China's now slightly diminished, but still large, current account surplus. When this has been achieved the authorities should further curtail their intervention in the foreign exchange market, remove the daily fluctuation limit on the renminbi (so that the currency would essentially be floating), and further liberalize restrictions on international capital flows. This policy trajectory would demonstrate that China is working cooperatively and constructively to address the global recession, reduce overinvestment in tradable goods industries, provide increased room for maneuver in the implementation of monetary policy, and put China on the path toward capital account convertibility.
Interview: China's Undervalued Currency
Nicholas R. Lardy
July 21, 2009
Book: Debating China's Exchange Rate Policy
Morris Goldstein and Nicholas R. Lardy, editors