International Financial Adjustment for China: A Financial Valuation Approach

25 Pages Posted: 18 Jan 2013

See all articles by Luke Deer

Luke Deer

University of Sydney

Ligang Song

Australian National University (ANU) - Crawford School of Public Policy

Date Written: January‐February 2013

Abstract

International financial adjustment is the process whereby valuation shifts from asset price and currency changes result in relatively durable net wealth transfers across countries' international balance sheets. This paper applies a financial valuation approach to estimate the direction and the broad extent of recent international financial adjustments on China's international balance sheet. We estimate China's international balance sheet losses resulting from the valuation shifts over the period 2005–2010 and reveal that international currency shifts over the past decade have also generated a range of non‐balance sheet financial and monetary adjustment pressures for China. This paper also evaluates how China's evolving international financial policy arrangements could better mitigate China's exposure to international financial adjustments. These arrangements include a more effective currency mechanism and the mechanisms to internationalize the RMB to buffer international financial valuation shocks.

Keywords: exchange rate regime, financial valuation approach, international financial adjustment, RMB internationalization

JEL Classification: E44, E58, F31, F36

Suggested Citation

Deer, Luke and Song, Ligang, International Financial Adjustment for China: A Financial Valuation Approach (January‐February 2013). China & World Economy, Vol. 21, Issue 1, pp. 1-25, 2013, Available at SSRN: https://ssrn.com/abstract=2202624 or http://dx.doi.org/10.1111/j.1749-124X.2013.12006.x

Luke Deer (Contact Author)

University of Sydney ( email )

Level 3, Social Sciences Building
Sydney, NSW 2006
Australia

Ligang Song

Australian National University (ANU) - Crawford School of Public Policy ( email )

Crawford Building
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

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