The International Political Economy of China’s Exchange Rate Policy Making

Abstract

This thesis examines the international political economy of China’s exchange rate policymaking from a theoretical and an empirical perspective. The literature review identifies the limitations in the existing Economics studies on the RMB exchange rate and the research gap of the Comparative Political Economy (CPE) and International Political Economy (IPE) approaches to exchange rate politics. The author develops a three-level game framework for China’s exchange rate policymaking based on revision and synthesis of the existing CPE and IPE approaches. Specifically, the three-level game framework refers to the Chinese leadership’s negotiations with the international bargainers (mainly the U.S. government and the IMF) at the international level (level I), negotiations between central government’s ministries (People’s Bank of China and Ministry of Commerce) at the central governmental level (level II) and negotiations with the domestic interest groups and local governments at the local level (level III). The main argument of the thesis is that the three-level game framework provides a richer portrait of the dynamism and complexity of China’s exchange rate policymaking. The three-level game framework is applied empirically through an examination of China’s exchange rate policymaking between 2003 and 2013. The empirical studies have four major findings. First, the level I game played an agenda-setting role in China’s exchange rate policymaking before the 2005 exchange rate reform. Second, the level II game determined the limited scope of the initial reform and the subsequent gradual RMB appreciation. Third, the level III game provided the most important sources for China’s exchange rate policy returning to the de facto dollar-pegged exchange rate regime during the global financial crisis. Lastly, the level I game once again played an agenda-setting role in the 2010 exchange rate reform, but the level II game was important as well, in which the Chinese leadership reached the consensus to allow the RMB to appreciate against the dollar in a gradual and steady manner to improve the confidence and promote the international use of RMB. This thesis provides original and systematic research on China’s exchange rate policymaking in the Hu-Wen era to the academic literature. It makes a modest theoretical contribution to the existing body of CPE and IPE literature by developing the three-level game framework to explain China’s exchange rate policymaking. More importantly, this research sheds light on the international political economy of China’s exchange rate policymaking based on documentary analysis and primary data from interviews and questionnaire surveys. Overall, this is a timely and rigorous study on the role that international and domestic politics play in forging China’s exchange rate policymaking.