China's exchange rate policy has a great impact on the economies of the United States and the rest of the world. This important new book, based on an October 2007 conference, looks at this issue in great detail.

The book has four sections. The first section assesses progress since China's July 2005 reform of its currency regime, with due attention to China s global current account position, movement of China s real effective exchange rate, the extent of the remaining misalignment of the renminbi, the roles of market forces and a currency basket in the determination of the renminbi exchange rate, and developments in the structure of the foreign exchange market.

The second section analyzes how Chinese exchange rate policy reform will affect, and will be affected by, reforms and constraints in other areas of economic policy.

The third section delves into the issues raised by China's exchange rate policies for international surveillance of exchange rates and for the timely correction of external payments imbalances. These issues include the appropriate rules of the game for International Monetary Fund (IMF) surveillance over exchange rate policies, the effects of China's exchange rate policies on other Asian emerging economies, and the contribution that US and European policies should make to external adjustment as a counterpart to and inducement for greater exchange rate flexibility in Asia.

Finally, the concluding section presents specific proposals for how China's exchange rate and capital account policies might be modified over the medium term.

These proposals address how best to eliminate any misalignment of the renminbi; how best to reduce pressures emanating from the sterilization of large reserve accumulation; how best to make capital flows the ally not the enemy of exchange rate policy; and what institutional arrangements and policy guidelines to put in place to reap the greatest benefits from management of China's large exchange reserves.

Contributors to the volume include: Lawrence Summers, Jeffrey Frankel, and Kenneth Rogoff, Harvard University; Simon Johnson and Steve Dunaway, International Monetary Fund; Mohamed El-Erian, Harvard Management Company; William R. Cline, Gary Clyde Hufbauer, Michael Mussa, Edwin M. Truman, and John Williamson, Peterson Institute; Barry Bosworth, Brookings Institution; Takatoshi Ito, University of Tokyo; Stephen Roach, Morgan Stanley; Fan Gang and Jin Zhongxia, People s Bank of China; Eswar Prasad, Cornell University; Shang-Jin Wei, Columbia University; Bert Hofman and Louis Kuijs, World Bank; Yung Chul Park, Seoul University; Jean Pisani-Ferry, Bruegel; Timothy Adams, Lindsey Group; and Brad Setser, Council on Foreign Relations.

Visit Debating China's Exchange Rate Policy Download Page

You can download the publication in pdf format. Provided by Peterson Institute.

Debating China’s Exchange Rate Policy
Morris Goldstein and Nicholas R. Lardy, editors 
April 2008 • 401 pp. ISBN 978-0-88132-415-0 • $28.95

Contents:

Preface
Acknowledgments
1. China's Exchange Rate Policy: An Overview of Some Key Issues
Morris Goldstein and Nicholas R. Lardy
2. Monetary Policy Independence, the Currency Regime, and the Capital Account in China
Eswar S. Prasad
3. Rebalancing China's Growth
Bert Hofman and Louis Kuijs
4. Estimates of the Equilibrium Exchange Rate of the Renminbi: Is There a Consensus and If Not, Why Not?
William R. Cline and John Williamson
5. The Management of China's International Reserves: China and a Sovereign Wealth Fund Scoreboard
Edwin M. Truman
6. The US Congress and the Chinese Renminbi
Gary Clyde Hufbauer and Claire Brunel
7. Influence of the Renminbi on Exchange Rate Policies of Other Asian Currencies
Takatoshi Ito
8. IMF Surveillance over China's Exchange Rate Policy
Michael Mussa
9. Commentary
Andrew Crockett, Fan Gang, C. Fred Bergsten, and Lawrence H. Summers
Keynote Address: China's Exchange Rate Policy and Economic Restructuring
Wu Xiaoling
About the Contributors
Index

Policy Options:

What options do Chinese authorities have going forward? Goldstein and Lardy present the options in terms of two competing approaches: a “stay the course” strategy and a “three-stage” approach.

A stay-the-course strategy would contain the following key elements: The renminbi would continue to be allowed to appreciate at a moderate but controlled pace against the dollar—say 5 to 8 percent a year. The scale of China’s exchange market intervention would control the pace of renminbi appreciation. Coming on top of the 15 percent nominal appreciation already achieved between July 2005 and January 2008, this would produce a nontrivial cumulative appreciation vis-à-vis the dollar over the next few years—presumably enough to keep foreign criticism at bay. Several substitutes for larger exchange rate appreciation, such as reduced valueadded tax rebates and less favorable tax and tariff treatment for exporters, would continue to be employed to put upward pressure on export prices and/or to reduce the profitability of exporting.

Also the central government would lean harder on both banks and local authorities not to finance or expand production in industries with clear excess capacity. More foreign buying trips could be arranged to publicize Chinese purchases of big-ticket US exports (e.g., Boeing aircraft). If China’s global current account surplus and reserve accumulation prove more resistant to these measures than expected, restrictions on capital outflows can be liberalized somewhat further. The daily fluctuation band for the renminbi vis-à-vis the dollar, which was increased from 0.3 to 0.5 percent in May 2007, could also be increased to, say, 0.8 percent, so as to increase uncertainty for speculators betting on renminbi appreciation.

However, such small and gradual policy responses are not likely to be effective because renminbi undervaluation and China’s external imbalance are much larger than they were, say, four years ago. The size and duration of the problem call for a bolder approach that would permit China to catch up in correcting its very large external disequilibria, while still keeping a lid on domestic social pressures. Goldstein and Lardy label it the three-stage approach to currency reform. In stage one, to begin immediately, China would undertake a 15 percent revaluation/appreciation of the renminbi (from its existing level). In stage two, the government would allow the renminbi to continue to float upward over the next several years, albeit at a gradual pace, say, 6 to 8 percent a year. And in stage three, say, four to six years down the road, intervention in the exchange market, along with sterilization operations, would be reduced still further, and the daily fluctuation limit on the renminbi would be dropped, so that the renminbi became essentially “floating.”

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