Balance of Payments Surplus and Renminbi Revaluation Pressure

Huayu Sun and Yue Ma
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Huayu Sun: University of International Business and Economics

No 32005, Working Papers from Hong Kong Institute for Monetary Research

Abstract: Based on a simple theoretical exchange rate model, this paper shows how persistent balance of payments surpluses build up appreciation pressure on a fixed exchange regime in a partially-open economy such as China. A deregulated market interest rate may work as an automatic stabilizer to release some of the appreciation pressures, but it cannot fully eliminate the appreciation pressure because of the zero interest rate floor. Strategic options for the government include improving the quality of domestic assets by reducing the non-performing loans of the banking sector, so that the substitutability of domestic and foreign assets will rise and the exchange rate will be stabilized. Secondly, more foreign currency loans may be issued through the state-owned banking sector to promote economic growth and increase income while at the same time reducing the level of foreign reserves.

Keywords: exchange rate model; revaluation pressure; government intervention; China (search for similar items in EconPapers)
JEL-codes: E58 F31 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2005-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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