China’s Exchange Rate Policy Making: International Pressures Meet Domestic Politics

Abstract

With China’s economic rise and in particular its massive international trade surplus with the rest of the world, the exchange rate of its currency has come under increasing scrutiny in the new millennium. Based on a critical review of existing International Political Economy (IPE) theoretical approaches on exchange rate politics – the Innenpolitik approaches and the international-domestic interaction approach – this paper argues that two-level game theory is a suitable tool for explaining the development of China’s exchange rate policy. By specifically examining the external factors and domestic sources of China’s exchange rate policy, this paper develops a complete analytical framework in which China’s central decision makers are understood to strive to reconcile international pressures and domestic bargainers when making decisions on exchange rate policy. After offering a theoretical review, revision and synthesis, the paper provides an empirical study of China’s 2005 exchange rate reform to specifically show how international factors played an agenda-setting role in China’s exchange rate policy making and how China’s domestic politics determined the pathway of the exchange rate reform in July 2005.