Balance of Payments Surplus and Renminbi Revaluation Pressure

20 Pages Posted: 23 Aug 2007

See all articles by Huayu Sun

Huayu Sun

affiliation not provided to SSRN

Yue Ma

City University of Hong Kong (CityU) - Department of Economics & Finance

Date Written: February 2005

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.

Keywords: exchange rate model, revaluation pressure, government intervention, China

Suggested Citation

Sun, Huayu and Ma, Yue, Balance of Payments Surplus and Renminbi Revaluation Pressure (February 2005). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 03/2005, Available at SSRN: https://ssrn.com/abstract=1009028 or http://dx.doi.org/10.2139/ssrn.1009028

Huayu Sun

affiliation not provided to SSRN

No Address Available

Yue Ma (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/yuema24

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