Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China
IMF Policy Discussion Paper No. 05/1
32 Pages Posted: 19 Apr 2005
Date Written: January 2005
This paper reviews the issues involved in moving towards greater exchange rate flexibility and capital account liberalization in China. A more flexible exchange rate regime would allow China to operate a more independent monetary policy, providing a useful buffer against domestic and external shocks. At the same time, weaknesses in China's financial system suggest that capital account liberalization poses significant risks and should be a lower priority in the short term. This paper concludes that greater exchange rate flexibility is in China's own interest and that, along with a more stable and robust financial system, it should be regarded as a prerequisite for undertaking a substantial liberalization of the capital account.
Keywords: Capital controls, exchange rate regime, financial sector weaknesses
JEL Classification: F3, F4, E6
Suggested Citation: Suggested Citation