Currency Concerns under Uncertainty: The Case of China

Sunanda Sen

Economics Working Paper Archive from Levy Economics Institute

Abstract: The recent declines in China's financial account balance ended the "twin surplus" era and led to a modest decline in the stock of official reserves, which reflects a reversal in expectations for the Chinese currency. Negative balances, which have been visible in China's financial balances since the last quarter of 2011, have heightened fears/anxiety in markets. These deficits stand in sharp contrast to the typical financial account surplus that existed until 2010. The announcement in September 2011 by Chinese monetary authorities of a "two-way floating" RMB in the foreign exchange market has unsettled market expectations and has led to a sharp fall in the financial balance. The latter brought a change in the expectations regarding the RMB-USD exchange rate. This change was reflected in the drop in foreign exchange assets, which was caused by a jump in short-term trade credits to prepay (for imports) in dollars, a rise in dollar advances from banks, and a withdrawal of dollar deposits. These changes have, of late, been a cause of concern relating to the future of China's economic relations vis-a-vis trading and financial partners, which include the United States. The experience of China, in a changing world beset with deregulation and with speculation affecting her external balance in recent years, provides further confirmation of John Maynard Keynes's observation, in 1937, regarding uncertainty in markets: "About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know."

Keywords: China; Financial Balances; Official Reserves; Twin Surpluses; Rebalancing; Expectations; Internationalization; Managed Exchange Rate (search for similar items in EconPapers)
JEL-codes: E31 E52 F42 O16 O53 (search for similar items in EconPapers)
Date: 2013-03
New Economics Papers: this item is included in nep-dev, nep-mac, nep-mon, nep-pke and nep-tra
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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