Reforms of China’s exchange rate regime and the renminbi internationalization

Abstract

Motivation: After four decades of very successful reforms, China has become one of the largest economies in the world. An important area of these reforms is the exchange rate system and monetary policy, which over the years has complied with economic objectives, in particular the promotion of economic growth by improving export competitiveness. The progressive liberalisation of the Chinese economy and its ever closer integration into the world economy require this policy to be adapted to changing circumstances. Aim: The aim of the article is to analyze China’s exchange rate policy from the perspective of the dilemma of choosing between using this policy to support export competitiveness and striving to internationalise the renminbi. Moreover, the author assesses the consequences of this policy for China’s economy and for the world economy. The study includes theoretical research (analysis of the literature and research reports) and empirical research (analysis of statistical data) using a descriptive analysis. Results: For many years China’s exchange rate policy has been focused on supporting economic growth by improving export competitiveness, resulting in both increasing internal imbalances and difficulties in stabilising inflation, as well as the accumulation of global payments imbalances. Since 2005 China has made its currency more flexible, so that the underestimation of the renminbi’s exchange rate has decreased. In recent years, China has intensified its efforts to support the internationalisation of the renminbi. However, the renminbi is not yet in rivalry with the US dollar as the dominant international currency, although the Chinese currency’s share as an international currency is increasing, which should have a positive impact on the stability of global financial relations.