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| China, what to do regarding its exchange rate policy? |
| By Dr. Olarn Chaipravat | | |
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I. Policy Choices Regarding FX Regime and Direction
Going forward, China has 3 practical choices regarding its future FX regime and direction:
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# A one-time up-valuation of the RMB of at least 10% relative to the USD, repegging the RMB at at least 7.5 RMB/USD, and keeping all the existing capital account control mechanisms and procedures in tact.
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# Learn and understand the workings of the FX market mechanisms and operations in China, esp. as regards behaviors of all private sector participants, both domestic and foreign operators, both in spot and forward FX, stock, bond, and money market operations; devise effective and prudential control mechanisms and operating procedures of FX market management and master FX intervention techniques to at least the Singaporean standards; then relax FX and capital account control rules to allow freer flows of int’l capital (inflows/outflows into/from China) with the aim of allowing the RMB to fluctuate (up or down) around ±5% (or 8.3±0.4 RBM/USD) a year.
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# Status quo, maintaining the current RMB peg at 8.3 RMB/USD for 1-2 years until choice# 2 is completed. |
| II. Implications and Risks: |
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has the least downside risk for China, Asia, and the world (inc. the USA and Japan). |
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has more risk of downward slide of the Chinese economy during the next 2-3 years (post-1986 Japan, as an example) due to monetary balance sheet contraction and slower growth in exports, imports, and real GDP of China and Asia. |
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is the riskiest option with the possibility of a second Asian financial crisis erupting if not well managed by China and coordination of FX and financial policies and mutual support of all the Asian economies (inc. Japan) have not been achieved via the ASEAN+3 Forum. |
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| III. Most Optimum Policy: |
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The move will then be from choice #3 to choice #2 when the financial and FX study and restructuring measures of China are completed in 1-2 years’ time. The world can help China and afford to wait for China’s readiness. Don’t rush! The downside risks involved for China, Asia, and the world are too great. Waiting 1-2 years can be well worthwhile if it means a repeat of a history of at least 15 years of unnecessary damage cause by wrong policies of major countries can be avoided. |
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If interested in viewing The Nation's Interview of Dr. Olarn, please Click Here for Details |
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The interpretations and conclusions given represent those of the authors. They
do not necessarily reflect the view of the Royal Thai Government, its
departments or other related institutions.
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