Exchange Rate Regime, Financial Market Bubbles and Long‐Term Growth in China: Lessons from Japan

26 Pages Posted: 13 Jan 2017

See all articles by Gunther Schnabl

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Multiple version iconThere are 2 versions of this paper

Date Written: January–February 2017

Abstract

Since 2014, capital inflows into China have turned into capital outflows, reversing the gradual appreciation path of the renminbi against the US dollar into an erratic depreciation path. The paper explains the current capital outflows by comparing China and Japan with respect to the impact of exchange rate expectations on speculative capital flows. It is argued that both in China and Japan, given benign liquidity conditions in the USA, policy‐induced appreciation expectations have generated capital inflows that have contributed to overinvestment and financial market bubbles. The current reversal of capital flows is seen as a signal that the bubble in China has burst. To stabilize growth in China and to discourage speculative capital outflows a fixed exchange rate to the dollar is recommended. Given Japan's experience and given that China's foreign assets remain high, the depreciation pressure on the Chinese renminbi can be expected to abate.

Keywords: China, capital controls, exchange rate policy, Japan, rebalancing, secular stagnation

JEL Classification: E32, E42, E58

Suggested Citation

Schnabl, Gunther, Exchange Rate Regime, Financial Market Bubbles and Long‐Term Growth in China: Lessons from Japan (January–February 2017). China & World Economy, Vol. 25, Issue 1, pp. 32-57, 2017. Available at SSRN: https://ssrn.com/abstract=2898482 or http://dx.doi.org/10.1111/cwe.12185

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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