China's exchange rate system after WTO accession : Some considerations

Abstract

China's foreign exchange system currently combines a virtual peg to the US dollar with direct capital account controls.With accession to the World Trade Organisation, China's capital control regime can be expected to lose its effectiveness in the face of accelerating liberalisation of trade and investment.While the country may experience in the medium term an increase in nominal and real shocks, the easing of capital controls is an inevitable requisite promoting development of China's domestic financial markets and integration with the global trade system and capital markets.Soft pegs with wide fluctuation bands or similar arrangements that retain certain capital controls could thus be adopted in the interim.Then, as China's financial markets develop and enterprises and banks begin to adhere consistently to market principles, a more flexible foreign exchange regime such as a managed float with relaxed capital controls could be introduced. Key words: China, exchange rate system, WTO accession