China's Exchange Rate and Financial Repression: The Conflicted Emergence of the Renminbi as an International Currency

38 Pages Posted: 13 Mar 2014  

Ronald McKinnon

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Date Written: February 21, 2014

Abstract

China has been provoked into speeding renmnibi internationalization. But despite rapid growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls — reinforced by financial repression in domestic interest rates — to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating (appreciating) exchange rate could attract even more hot money inflows, the People’s Bank of China should focus on tightly stabilizing the yuan/dollar exchange rate to encourage naturally high wage increases for balancing China’s international competitiveness.

Keywords: China, informal dollar standard, internationalization of renminbi, exchange rate stabilization, inflation, financial repression

JEL Classification: F150, F310, F330

Suggested Citation

McKinnon, Ronald and Schnabl, Gunther, China's Exchange Rate and Financial Repression: The Conflicted Emergence of the Renminbi as an International Currency (February 21, 2014). CESifo Working Paper Series No. 4649. Available at SSRN: https://ssrn.com/abstract=2407891

Ronald McKinnon

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

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