Suchergebnisse

As the world's second largest economy, largest trading nation, and the largest foreign holder of United States (US) government bonds, the People's Republic of China (PRC) needs a currency with international status that can match its economic status in the global economy. However, sequencing is important. Before the internationalization of the yuan can make meaningful progress, necessary conditions, such as the existence of deep and liquid financial markets, a flexible exchange rate and interest rates responsive to market conditions must be created. The process of yuan internationalization essentially is a process of capital account liberalization. Due to the unprecedented and complex global financial crisis and the PRC's huge imbalances, capital account liberalization has to be pursued in a cautious way. As a result, the internationalization of the yuan is bound to be a long-drawn process. The PRC's road map for the internationalization of the yuan is flawed with many missing links and wishful thinking. Yuan internationalization guided by the current road map may be proven counterproductive.

The relatively successful management of cross-border capital flows has enabled the People's Republic of China (PRC) to achieve an extremely high average growth rate of more than 10 percent while keeping inflation under control. The management of cross-border capital flows is an indispensable element of macroeconomic stability. In order to cool down the overheating economy, the PRC government will continue to implement a tight monetary policy. In the face of possible further cuts in US interest rates, the PRC's monetary tightening is becoming increasingly difficult. Hence, the PRC must maintain capital controls whenever possible, and improve its management of cross-border capital flows, to enable the People's Bank of China (PBOC) to implement an independent monetary policy to sustain the economy's growth into the next decade.

Over the past ten years since the Asian financial cisis, the Chinese economy has been performing extremely well. While emphasising the extremely positive growth performance China has had so far, this article also identifies key threats to the country's economic stability in the future. Among the sources of vulnerability are: a still somewhat fragile financial system, in particular banks, despite recent reforms in the system and improvements in some of its key indicators; the excessive liquidity in the economy, which is a major factor behind bubbles and inflation, and a new challenge facing Chinese economic authorities. The article also discusses how China may prevent a crisis from happening, highlighting the role capital controls can play in crisis prevention, and draws lessons on this from the Asian crisis. (IDS Bull/GIGA)