China and the Impossible Trinity: Economic Transition and the Internationalization of the Renminbi

Contemporary Chinese Political Economy and Strategic Relations: An International Journal

Guorui Sun¹  Alex Payette² 

[1] London School of Economics;University of Montreal;

关键词: Renminbi (RMB) internationalization;    economic transition;    impossible trinity;   

DOI  :  

来源: DOAJ

【 摘 要 】

With the recent formal inclusion of the Renminbi (RMB) into the IMF’s Special Drawing Right (SDR) currency basket, prospects for further internationalization of the RMB are improving. However, as China attempts to simultaneously undergo an economic transition into a more balanced growth model, and the internationalization of its currency, pressures are mounting from the impossible trinity. The latter is based on the Mundell-Flemming model. The latter posits a policy-choice problem in which a country cannot simultaneously have unfettered capital movement, an independent monetary policy, and a fixed exchange rate system. Naturally, three baskets of policy combinations are possible. Historical events such as the Asian financial crisis (1997-1998) have demonstrated that countries are strictly bound by the impossible trinity. The paper posits that China should opt for the policy basket of a fully liberalized capital account, fully liberalized interest rates, and maintain its current basket peg exchange rate regime but eventually allow for a greater spread. The policy sequence should begin with the liberalization of the interest rates while maintaining the current level of capital controls. Once adequate time has been given to allow the domestic financial and economic system to adjust and consolidate itself, the liberalization of the capital account should be the next goal. Finally, the basket peg exchange rate regime should be allowed a greater float. While the interest rates and the capital account are undergoing liberalization, the exchange rate should operate as a policy tool so as to minimize shocks to the domestic economic system. The policy basket and sequence have been chosen because they are conducive to a risk-averse economic transition from the current export-led growth model. The paper visits the cases of Hong Kong, the United States, and the European Union to examine their policy choice vis-à-vis the impossible trinity in order to make a case for why China should opt for the suggested policy basket.

【 授权许可】

Unknown