China's Monetary Challenges: Past Experiences and Future by Richard C. K. Burdekin

By Richard C. K. Burdekin

Regardless of the People's Republic of China's striking progress over the post-1978 reform interval, questions have arisen in regards to the sustainability of its alternate fee coverage and the steadiness of its economic climate. This booklet specializes in the major financial demanding situations to China's endured development and addresses such topical concerns because the buildup of foreign currency reserves, financial keep watch over, credits allocation problems, and the increasing position of China's asset markets and inventory exchanges. present and prior financial coverage thoughts are tested intimately as are the banking zone reforms major as much as complete international festival in December 2006. The research additionally assesses the People's Republic's function inside larger China (including Hong Kong and Taiwan) and the opportunity of destiny renminbi financial hegemony inside Asia. The therapy of those concerns is meant to be obtainable to non-economists and doesn't think past immersion within the underlying formal types.

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8 The expected appreciation implied by the nondeliverable forward market persistently exceeded actual appreciation over the 2002–2006 period. As pointed out by Higgins and Humpage (2005), this likely reflects the effects of the so-called “peso problem,” whereby market participants seek protection against a possible sudden, large adjustment. In the case of the renminbi, attaching even a small probability to major revaluation would be sufficient to push the appreciation implied by the nondeliverable forward market persistently above the actual exchange rate moves.

1 (Zhou Xiaochuan, Governor of the People’s Bank of China, 2006b, p. 4) Introduction The upward pressure on the renminbi in the early twenty-first century arose in the midst of generalized dollar weakness. Sharp interest rate reductions by the US Federal Reserve after September 11, 2001, coupled with mushrooming US current account deficits, were met by a decline in the value of the US dollar against most major world currencies from 2002 onwards. Subsequent Federal Reserve rate hikes were insufficient to more than temporarily suspend the dollar downturn in 2005, and dollar depreciation quickly reaccelerated in the face of continued record US trade deficits and new Federal Reserve rate cutting initiated in the second half of 2007.

As discussed in the previous chapter, the US trade deficit has also continued to rise unabated even while the dollar depreciated considerably after 2001. By the time of China’s July 2005 exchange rate policy change, the dollar had lost nearly a quarter of its value on average against other major world currencies in little over three years, even after including the short-lived “bounce” in the first half of 2005. 9% of total US trade in 2006, one has to wonder whether any plausible adjustment of the Chinese currency could, on its own, yield any sustained reversal of this trend.

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