Policy strategies to deal with revaluation pressures on the renminbi

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Journal article

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China Economic Review

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China, Exchange rate model, Government intervention, Revaluation pressure


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.



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Funding Information

This research was supported in part by a Competitive Earmarked Research Grant (No. LU3110/03H) from the RGC of Hong Kong SAR Government, a research grant from Lingnan University, Hong Kong (No. DR04B4), and research support from Macroeconomic Research Centre, Xiamen University, China, and a research grant of the 211 University Advancement Project entitled “China's sustainable development under the WTO”, sponsored by the Education Ministry of P.R. China. {LU3110/03H, DR04B4}

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Copyright © 2004 Elsevier Inc. All rights reserved. Access to external full text or publisher's version may require subscription.

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Recommended Citation

Sun, H., & Ma, Y. (2005). Policy strategies to deal with revaluation pressures on the renminbi. China Economic Review, 16(2), 103-117. doi: 10.1016/j.chieco.2004.10.001