The Modification of the Chinese Exchange Rate Policy

Abstract

On July 21st 2005, China slightly revalued the yuan and officially modified the exchange rate system. Interpreting this move as only the outcome of international pressures to reduce international trade imbalances is however misleading. To support our argument, we explore the rationale of the July 21st decision through a review of the twin debates of the exchange rate level / system in China. We argue that both external and internal concerns are taken into account by the Chinese authorities in the management of the exchange rate. Moreover, responsibility for the management of the Chinese exchange rate among the imbalance in world trade is in doubt. The review of recent developments since the July 21st decision shows that its impact is limited. While “hot money” inflows seem to have been tamed, previous economic trends have not yet been modified.