Guonan Ma: China’s financial liberalisation: interest rate deregulation or currency flexibility first?

China’s financial liberalisation: interest rate deregulation or currency flexibility first?
– part one
by Guonan Ma on 13th May 2014

Part I discusses three institutional factors favouring a strategy of greater currency flexibility ahead of fuller domestic interest rate liberalisation. Part II (coming later this week) explores three cyclical factors that would tend to favour the same strategy.

China’s central bank, the People‚Äôs Bank of China (PBC), is currently negotiating a tricky transition away from a convoluted monetary regime that features a managed currency, a controlled capital account and a regulated domestic interest rate. Chinese policymakers have so far pursued a financial liberalisation strategy involving simultaneous and small steps on all three fronts: incremental opening up of the capital account, deregulating most of the domestic interest rates except the official ceilings on benchmark bank deposit rates, and instilling some two-way FX volatility into the renminbi (RMB). The global financial system and economy has a big stake in the fate of Chinese financial liberalisation, which is promising but risky.

Read more at Bruegel…

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