China's Monetary Challenges: Past Experiences and Future Prospects

China's Monetary Challenges: Past Experiences and Future Prospects

Richard C. K. Burdekin

Language: English

Pages: 272


Format: PDF / Kindle (mobi) / ePub

Despite the People's Republic of China's remarkable growth over the post-1978 reform period, questions have arisen about the sustainability of its exchange rate policy and the soundness of its financial system. This book focuses on the key monetary challenges to China's continued advancement and addresses such topical issues as the buildup of foreign exchange reserves, monetary control, credit allocation difficulties, and the expanding role of China's asset markets and stock exchanges. Current and past monetary policy strategies are examined in detail as are the banking sector reforms leading up to full foreign competition in December 2006. The analysis also assesses the People's Republic's role within Greater China (including Hong Kong and Taiwan) and the potential for future renminbi monetary hegemony within Asia. The treatment of these issues is intended to be accessible to non-economists and does not assume prior immersion in the underlying formal models.

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over the period from the second quarter of 2002 to the third quarter of 2004. Still another approach is to incorporate the effects of relative productivity levels by employing cross-sectional analysis to assess the “average” relationship between relative productivity levels, or relative per capita income levels, and real exchange rates across countries. Frankel (2006) suggests that, based on the extent to which China’s real exchange rate failed to keep up with the “average” reaction to income

However, Chinese authorities previously had to confront much more severe upward spikes in inflation in both 1988–1989 and 1993–1995. Inflation peaked at over 24% in 1994 before falling back to single digits in 1996 and less than zero in 1998. By 1998, the government’s concern clearly shifted to the slowing growth rate of the economy and the weaknesses in the nation’s banking system. The increased government expenditures aimed at boosting growth and recapitalizing the banks helped end China’s

hand, remained more or less in line with the rule’s predictions. In reapplying the McCallum rule to an extended 1990–2006 dataset, the estimates reported in this chapter not only allow the response to the nominal GDP output gap to be determined by the data but also simultaneously allow for money supply reactions to the rate of change of foreign exchange reserves, 5:0 P1: SQE/KFO CUUS233-04 P2: SQE cuus233 88 head margin: 1/2 978 0 521 88016 9 gutter margin: 7/8 May 6, 2008 China’s

past movements, on average, help predict future movements. After converting the stock price series into log first difference form to assure stationarity, allowance was made for effects of lagged values going back four months together with a constant and a time trend. Only one lag, that is the 19 This end-of-month series was collected from contemporary newspapers by Bailey and Bhaopichitr (2004) and kindly provided to the author by Warren Bailey. 23:5 P1: SQE/KFO CUUS233-05 P2: SQE cuus233

interbank market (Zhang, 1999, pp. 10–11). In December 1996 the renminbi became fully convertible on the current account (Zhang, 2006, p. 14). As the new arrangements eliminated any remaining scope for the authorities maintaining balance through foreign exchange controls on current account transactions, exchange rate pressure emerged as a potentially important source of monetary and price fluctuations. The effect of 1994’s $US 30.5 billion balance of payments surplus on the renminbi/US dollar

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