Exchange rate regimes in China

Abstract

Since the opening of the Chinese economy in 1978, China has continually reformed its economic structure and exchange rate regime to liberate the centrally planned economy to a more market-oriented economy. Several different exchange rate regimes have been adopted from time to time to aid with the different stages of economic development where a hard peg regime has gradually been replaced by a more flexible managed float in the past 30 years. Through the report, it can be concluded that a managed float is the most suitable regime for China. This regime can provide the flexibility and stability of the currency allowing a more sustainable economic development in the long run. Although according to the impossible trinity theory a country with fixed exchange rate and independent monetary policy cannot have free capital flow, many countries are able to achieve all three by adopting intermediate regimes. Therefore, as long as capital control does not completely ban all capital flows, a managed float regime will allow China to enjoy a certain level of market openness without losing currency stability.