Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China
IMF Policy Discussion Papers, January 1, 2005
Source details
- Canonical URL
- Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China
Other formats
Bibliographic details
- Authors: Eswar S Prasad, Qing Wang, Thomas Rumbaugh
- Published: January 1, 2005
- Series: IMF Policy Discussion Papers
- DOI: https://doi.org/10.5089/9781451975451.003
Summary and Main Findings
- The 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.
- Weaknesses in China’s financial system suggest that capital account liberalization poses significant risks and should be a lower priority in the short term.
- The 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.
Policy Implications and Recommendations
- Prioritize greater exchange rate flexibility to enable a more independent monetary policy and to provide a buffer against shocks.
- Strengthen and stabilize the financial system before pursuing substantial capital account liberalization.
- Treat a more stable and robust financial system as a prerequisite for significant capital account opening.
Subject Areas and Keywords
- Subject: Balance of payments, Capital account, Capital account liberalization, Capital controls, Exchange rate arrangements, Exchange rate flexibility, Foreign exchange
- Keywords: Capital account, capital account control, Capital account liberalization, capital account restriction, Capital controls, capital controls in China, China, controls in China, exchange rate, exchange rate appreciation, Exchange rate arrangements, Exchange rate flexibility, exchange rate flexibility debate, exchange rate regime, exchange rate volatility, financial sector reforms, foreign currency, Global, nominal exchange rate, PDP, rigid exchange rate regime, transmission mechanism, undervalued exchange rate