Chinese monetary policy

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Marvin Goodfriend and Eswar Prasad rethink the renminbi debate at VoxEU:

[U]ntil recently, the rise in the US trade deficit with China was matched by the decline in the deficit with the rest of Asia, leaving the US deficit with all of Asia unchanged. China’s accession to the WTO in 2001 opened up US markets to Chinese imports and more Asian trade is now routed through China in order to take advantage of cheaper labour there to process and package goods in their final stages of production. So the bilateral US (or EU) trade deficit with China is not in itself very meaningful.

Moreover, the renminbi has been maintained at a stable rate relative to the US dollar for over a decade now, even during the Asian crisis when the Chinese were under pressure to devalue the renminbi. So to argue that the fixed exchange rate reflects a new and deliberate policy of undervaluation is disingenuous.

Nevertheless, economic fundamentals — such as the rapid productivity growth in China — clearly point to strong pressures for the renminbi to appreciate in value…

This debate has so far been framed in a way that largely misses the key point. What is essential for China is to have an independent monetary policy oriented to domestic objectives. China’s monetary policy has hitherto been hamstrung by the tightly managed exchange rate regime. This regime prevents the People’s Bank of China (PBC) from raising interest rates to manage domestic demand since such a move could spur further capital inflows and increase pressure on the exchange rate. Giving the PBC room to raise interest rates by freeing it from having to target a particular exchange rate would help rein in credit growth and deter reckless investment, reducing the risk of boom-bust cycles. A key point here is that an independent monetary policy requires a flexible exchange rate, not a one-off revaluation.

Read the full piece to learn about their (daring?) policy prescription: inflation targetting.

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2 Responses to “Chinese monetary policy”

  1. TO Says:

    http://www.bis.org/publ/work233.pdf

    But, the Chinese already have monetary autonomy because they employ effective capital controls. See the link above,

  2. Jamie Says:

    Good view on Chinese monetary policy.
    I think let the yuan trade freely on world markets would be better.The unexpected change often brings the unexpected consequence. But China’s economy expanded 11.9 percent last quarter — the fastest quarterly growth in 12 years — and the trade surplus jumped by 85 percent in June to $26.9 billion. So it’s time for US to speed up his exporting to China and make the balance. Demand for many US products in China are very strong,but there are few, if any, effective methods for US SMF’s to access Chinese buyers and meet the demand. AC-Ali enables US businesses to list their company and product descriptions in English. AmeriChinaB2B will translate these descriptions in Chinese and put them on its China Business platform http://www.acb2b.cn. which attracts a large number of Chinese importers and distributors looking for American products to import to China. Welcome to AmeriChinaB2B( http://www.acb2b.com/ ) to begin your business trip of China.

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