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

Prasad, Eswar; Rumbaugh, Thomas; Wang, Qing

doi:10.2139/ssrn.701273

Cited by 81 publications

(47 citation statements)

References 20 publications

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“…Indeed, there is a compelling case to be made that rigid exchange rate regimes can make a country more vulnerable to crises when it opens its capital markets. For example, Prasad, Rumbaugh and Wang (2005) survey a number of industrial and developing country experiences showing that the combination of capital account liberalization and a fixed exchange rate regime have often ended in forced and messy exits to more flexible exchange rate regimes. It can be argued that, in the absence of de facto or de jure fixed rates, most of the crises of the 1990s, from Mexico to Asia to Russia to Brazil, might have been much less virulent, or might even have been avoided entirely.…”

Section: Monetary and Exchange Rate Policiesmentioning

confidence: 99%

Financial Globalization and Economic Policies*

Köse¹,

Prasad

Rogoff

et al. 2010

Handbook of Development Economics

132

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S ABSTRACT Financial Globalization and Economic Policies *We review the large literature on various economic policies that could help developing economies effectively manage the process of financial globalization. Our central findings indicate that policies promoting financial sector development, institutional quality and trade openness appear to help developing countries derive the benefits of globalization. Similarly, sound macroeconomic policies are an important prerequisite for ensuring that financial integration is beneficial. However, our analysis also suggests that the relationship between financial integration and economic policies is a complex one and that there are unavoidable tensions inherent in evaluating the risks and benefits associated with financial globalization. In light of these tensions, structural and macroeconomic policies often need to be tailored to take into account country specific circumstances to improve the risk-benefit tradeoffs of financial integration. Ultimately, it is essential to see financial integration not just as an isolated policy goal but as part of a broader package of reforms and supportive macroeconomic policies.JEL Classification: F02, F21, F36, F4

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Section: Monetary and Exchange Rate Policiesmentioning

confidence: 99%

Financial Globalization and Economic Policies*

Köse¹,

Prasad

Rogoff

et al. 2010

Handbook of Development Economics

132

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“…On the one hand, the surge in inflows reflected the liberalization of the country's current account around the time of its accession to the World Trade Organization in 2001 as exports in goods and services grew at an impressive rate of 20 percent a year on average. On the other hand, a steady increase in portfolio investment was observed as China loosened its capital account restrictions beginning in 2002 by allowing greater access to its stock and bond markets by foreign investors (Prasad, Rumbaugh & Wang, 2005).…”

Section: ⅱ Sterilization By the People And Trade Liberalization In Cmentioning

confidence: 99%

Real Exchange Rate Anomalies in China: Sterilization by the People and Trade Liberalization

Chan¹

2015

Glob Bus Financ Rev

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A B S T R A C TWhen a fixed exchange rate country is faced with a sudden increase in foreign exchange inflows, its economy would normally experience higher inflation and real exchange rate appreciation. Between 1998 and 2006, however, China underwent a period of surging influx of foreign exchange and accumulation of vast reserves with little inflation or changes in the real exchange rate. Instead of sterilization by the central bank, this paper argues that the small change was largely due to "sterilization by the people"-the public voluntarily increased their holdings of monetary balances because of a rise in income or change in preferences-hence alleviating the inflationary pressure on the economy. In addition, the easing of import restrictions also helped offset some of the extra foreign exchange coming into China. An open economy model that highlights the role of the monetary approach is used to demonstrate how increased money demand and trade liberalization can mitigate the impact of the inflows on the domestic price level and the real exchange rate.

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“…They should become a real competitive force in the intermediation of domestic savings. 23 Prasad, Rumbaugh and Wang (2005) argue that exchange rate flexibilization may come first, but they acknowledge that it needs to be followed up by capital account liberalization.…”

Section: On Financial Liberalizationmentioning

confidence: 99%

China's Banking Reform: An Assessment of its Evolution and Possible Impact

2005

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The Chinese banking system, characterized by massive government intervention, poor asset quality and low capitalization, has started a reform process based on the three main pillars: (i) bank restructuring, through the cleaning-up of non-performing loans (NPLs) and public capital injections, particularly in the four largest state-owned banks; (ii) financial liberalization, with the gradual flexibilization of quantity and price controls, the opening-up to foreign competition and cautious steps towards capital account liberalization and (iii) strengthened financial regulation and supervision, coupled with efforts to improve corporate governance and transparency. Although the reform is still ongoing, our preliminary assessment indicates that there has been an improvement in the soundness of the Chinese banking system. However, changes in the reform strategy are needed for it to be fully successful. Asset quality has improved, particularly in the recapitalized banks, but there is a high risk of a new build-up of NPLs. Capitalization has increased in the largest banks, as a consequence of the government capital injections, which generally remains low, as well as profitability. China's huge financing needs, to maintain high economic growth, and its commitment to fully open up its banking system to foreign competition urgently require a more comprehensive and time-bound strategy, with a longterm vision of the desired structure of the Chinese banking system. Bank recapitalization should be completed immediately, not only to ensure bank soundness, but also to increase profitability, which could be further hampered as the competition increases with full financial liberalization. Bank recapitalization, however, needs to be accompanied by a radical improvement in corporate governance, which would clearly be facilitated by a change in the property structure. (JEL classification: E44, E66, G2, G21)

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

Cited by 81 publications

References 20 publications

Financial Globalization and Economic Policies*

Financial Globalization and Economic Policies*

Real Exchange Rate Anomalies in China: Sterilization by the People and Trade Liberalization

China's Banking Reform: An Assessment of its Evolution and Possible Impact

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