Balance of Payments, Exchange Rate, and Foreign Exchange Reserves in China since 1979

Vladimir Popov

MPRA Paper from University Library of Munich, Germany

Abstract: China was extremely successful in recent decades in managing external equilibrium in the short and medium term using three mechanisms to cushion the balance of payments shocks. First, it maintained a flexible rate, so could adjust to the fluctuations in trade balance and capital flows via devaluation/appreciation of national currency. Second, it exercised a capital account control that prevented the sudden and sizeable outflow of capital. And third, its foreign exchange reserves were the largest in the world and large even as compared to its GDP and foreign trade and capital flows, so they could have been used to absorb negative trade and capital account shocks with full sterilization (without a fear of continuous outflow of capital due to capital control). In particular, China survived the Asian currency crisis of 1997 better than the other countries – its reserves even did not decrease in 1997 and its GDP growth rates virtually did not decline. However, in the long term the abandonment of the policy of foreign exchange reserves accumulation (since the Great Recession of 2008-09) led to the considerable appreciation of the real exchange rate of yuan, the decline in the ratio of export to GDP and the share of investment in GDP. The result was the slowdown of growth: GDP growth rates fell from 14% in 2007 to 5% in 2024.

Keywords: balance of payments; foreign exchange reserves; external and internal equilibrium; exchange rate; slowdown of growth in China (search for similar items in EconPapers)
JEL-codes: F31 F32 F41 N15 O24 O40 (search for similar items in EconPapers)
Date: 2024-08-02
New Economics Papers: this item is included in nep-cna, nep-his, nep-int, nep-mon, nep-opm and nep-sea
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