China and Its Dollar Exchange Rate

Ronald I. McKinnon and Gunther Schnabl

in The Unloved Dollar Standard

Published in print December 2012 | ISBN: 9780199937004
Published online January 2013 | e-ISBN: 9780199980703 | DOI:
China and Its Dollar Exchange Rate

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China is criticized for keeping its dollar exchange rate fairly stable when it has a large trade (saving) surplus. This chapter argues that this criticism is misplaced in two ways. First, no predictable link exists between the exchange rate and the trade balance of an international creditor economy. Second, since 1995, the stable yuan/dollar rate has anchored China's price level and facilitated countercyclical fiscal policies that have smoothed its high real GDP growth at a remarkable 9 to 11 percent per year. With its now greater GDP, China displaces Japan as the largest economy in East Asia—but with a much stronger stabilizing influence on East Asian neighbors from its higher economic growth and more stable dollar exchange rate. Now, an ever larger China is an essential stabilizer for the world economy—as exemplified by its prompt and effective fiscal response to the global credit crunch of 2008–9. However, cumulating financial distortions—in China and the United States—threaten to undermine China's growth and its stabilizing influence on the rest of the world.

Keywords: dollar exchange rate; trade surplus; international creditor; countercyclical; high growth

Chapter.  3255 words.  Illustrated.

Subjects: Financial Markets

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