Abstract

With China coming to occupy a central place in the global economy, the country’s economic policies are attracting significant international attention. The Chinese government has indicated that it intends to liberalize capital controls. Meanwhile, the Yuan has been pegged to the dollar for a decade. There is a widespread belief that the Yuan has become significantly undervalued. But senior Chinese politicians believe that China cannot let its exchange rate move more freely before it fixes its weak banking system. Otherwise, there will be a large outflow of capital. China seems intent on relaxing capital controls before setting its exchange rate free. Is China better off moving cautiously in liberalizing its capital account, and moving more rapidly towards greater exchange-rate flexibility? What should China do?

Learning Objectives

The case is structured to achieve the following Learning Objectives:

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Keywords

China, The Yuan, Pegged to the dollar, China's Economic Policies, Chinese Government, Liberalizing capital controls, Weak banking system, Relaxing capital controls and Greater exchange-rate flexibility