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Balance of Payments Surplus and Renminbi Revaluation Pressure

Author

Listed:
  • Huayu Sun

    (University of International Business and Economics)

  • Yue Ma

    (Lingnan University, Hong Kong Institute for Monetary Research, Macroeconomic Research Centre, Xiamen University)

Abstract

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.

Suggested Citation

  • Huayu Sun & Yue Ma, 2005. "Balance of Payments Surplus and Renminbi Revaluation Pressure," Working Papers 032005, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:032005
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    References listed on IDEAS

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    Cited by:

    1. Straub, Roland & Thimann, Christian, 2010. "The external and domestic side of macroeconomic adjustment in China," Journal of Asian Economics, Elsevier, vol. 21(5), pages 425-444, October.

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    More about this item

    Keywords

    exchange rate model; revaluation pressure; government intervention; China;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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