Abstract
The accelerated expansion of China’s trade and current account surpluses since 2004, and the associated expansion of China’s foreign exchange reserves in the context of very rapid investment-driven domestic economic growth and adverse movements in China’s terms of trade have led China’s authorities to make several policy adjustments: (a) Substitution of a crawling peg to the US dollar for the hard peg previously maintained. (b) Some liberalization of private capital outflows, including of outward direct investment and progressive capital account convertibility. (c) Ratcheting back of measures to attract capital inflows. (d) VAT rebate cuts targeted at less sophisticated industries such as textiles. This note first reviews China's role in the growth of global imbalances and considers the central issue of the valuation of the yuan. It then considers the interpretation of the shift to a crawling peg in light of the other policy moves which, taken together, point to a broader policy shift.
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