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Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China

Eswar Prasad (), Qing Wang and Thomas Rumbaugh

No 05/1, IMF Policy Discussion Papers from International Monetary Fund

Abstract: This paper reviews the issues involved in moving towards greater exchange rate flexibility and capital account liberalization in China. A more flexible exchange rate regime would allow China to operate a more independent monetary policy, providing a useful buffer against domestic and external shocks. At the same time, weaknesses in China’s financial system suggest that capital account liberalization poses significant risks and should be a lower priority in the short term. This paper concludes that greater exchange rate flexibility is in China’s own interest and that, along with a more stable and robust financial system, it should be regarded as a prerequisite for undertaking a substantial liberalization of the capital account.

Keywords: Capital controls; China; exchange rate regime, financial sector reforms, capital account, capital inflows, capital account liberalization, capital flows, financial sector weakness, (search for similar items in EconPapers)
Pages: 32
Date: 2005-01-01
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