The Chinese Economy in the Asian Financial Crisis: The Stability of RMB

Abstract:     
The Chinese economy has been reasonably stable during the Asian financial crisis. However, there is a widespread speculation about the prospect of the stability of RMB, the Chinese currency. While the Chinese government has repeatedly promised the stability of RMB, many oversea economists have downgraded the future RMB. Unlike speculations by many in the academic and business circles outside China, this paper argues that the Chinese government is able to and will defend RMB in the near future. The cost for China to defend RMB is not formidably high for the time being. However, as China implements an expansionary macroeconomic policy, hence the macroeconomic environment changes, it will be economically unacceptable to peg the RMB to the U.S. dollar. The uncertainty of the Hong Kong dollar and the economy of Hong Kong is another concern for the RMB stability. In the long run, the exchange rate of RMB will have to be adjusted.

Number of Pages in PDF File: 20

JEL Classification: F3, F4, O5

working papers series