Balance of Payments Surplus and Renminbi Revaluation Pressure

20 Pages Posted: 23 Aug 2007 Last revised: 5 Aug 2022

Date Written: February 1, 2005

Abstract

This working paper was written by Huayu Sun (University of International Business and Economics) and Yue Ma (Lingnan University and Macroeconomic Research Centre, Xiamen University).

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

Hong Kong Institute for Monetary and Financial Research, Balance of Payments Surplus and Renminbi Revaluation Pressure (February 1, 2005). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 03/2005, China Economic Review, Vol. 16, No. 2, 2005, Available at SSRN: https://ssrn.com/abstract=1009028 or http://dx.doi.org/10.2139/ssrn.1009028

Hong Kong Institute for Monetary and Financial Research (Contact Author)

Hong Kong Institute for Monetary and Financial Research ( email )

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Hong Kong
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