After four decades of reforms, China has become one of the biggest economies of the world and its exchange rate policy is a key factor in this process. The paper focuses on the conditions that have shaped the directions of China’s exchange rate policy at every stage of its evolution, the measures taken and the results achieved in terms of the policy’s effect on the economic growth and balance of payments. It is shown that active state interference in the exchange market policy in the early stages resulted in the undervalued yuan exchange rate and also encouraged positive dynamics of internal production due to the enhanced national export competitiveness. In subsequent stages, liberalization of China’s economy, its integration in the global economic relations, its bigger contribution to the global product manufacturing and export led to the increased role of market forces in the yuan exchange rate formation. Some practical measures taken in this direction encouraged the balanced yuan exchange rate, lower surplus of current accounts and increase in balance volatility of capital and financial accounts. Currently, the yuan exchange rate is still controlled. China’s monetary authorities mostly use international reserves to regulate the yuan exchange rate. The paper concludes that it is necessary to further increase the influence of market factors in the yuan exchange rate formation and diversification of the yuan stability instruments in order to maintain export growth rates, to develop China’s financial market and to expand the scope and international spheres of the yuan use.
Capital Controls or Real Exchange Rate Policy? A Pecuniary Externality Perspective
