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
Prasad, Eswar S. and Rumbaugh, Thomas and Wang, Qing, Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China (January 2005). IMF Policy Discussion Paper No. 05/1. Available at SSRN: https://ssrn.com/abstract=701273 or http://dx.doi.org/10.2139/ssrn.701273