Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China

Author/Editor:

Eswar S Prasad ; Qing Wang ; Thomas Rumbaugh

Publication Date:

January 1, 2005

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Policy Dicussion Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Policy Discussion Paper No. 2005/001

Subject:

Balance of payments Capital account Capital account liberalization Capital controls Exchange rate arrangements Exchange rate flexibility Foreign exchange

English

Publication Date:

January 1, 2005

ISBN/ISSN:

9781451975451/1564-5193

Stock No:

PPIEA2005001

Pages:

32

Please address any questions about this title to publications@imf.org