China’s Impossible Trinity: The Structural Challenges to the by Chi Lo

By Chi Lo

This e-book highlights the tricky coverage selection that needs to finally be made in the course of China's structural reform in accordance with the speculation of the most unlikely Trinity, among trade fee and financial coverage autonomy.

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Extra info for China’s Impossible Trinity: The Structural Challenges to the “Chinese Dream”

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The transitional risks cannot be eliminated, but they can be alleviated by having a flexible exchange rate in conjunction with selective and gradual capital account liberalisation measures that are designed to attain certain collateral benefits (Prasad and Rajan 2008). China’s heavily managed exchange rate, which often makes it a de facto fixed exchange rate against the US dollar, has complicated its situation of capital account opening because it deprives the system of the ability to absorb economic shocks and, hence, makes the economy harder to cope with capital flow volatility.

But this may be changing. First, income and wealth inequality has become more severe as the country grows richer. 3). This has raised the awareness among the bottom strata of the society that it is policy made at higher levels, not just corruption and incompetence of local officials, which bars them from sharing the benefits of economic growth. Second, the wealthy and the intellectuals are taking more interest in politics and the reform process to protect/fight for their interests, or even to take part in the rent-seeking3 activity that has emerged as a by-product of economic reform.

So China’s closed capital account is barring capital flight from taking place. In other words, such a potential risk of massive capital outflow argues against full capital account convertibility and, hence, fast RMB internationalisation anytime soon. In the medium term, China will probably keep its asymmetric stringent capital control, which allows capital to come into the country much more easily than taking it out. This practice is meant to minimise the possibility of massive capital flight that could destabilise China’s financial system.

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