《Effectiveness of china#39;s monetary policy and reform of its foreign exchange system》.pdfVIP

48 China World Economy / 48 64, Vol. 14, No. 5, 2006 Effectiveness of China s Monetary Policy and Reform of Its Foreign Exchange System X inhua Gu, L an Zhang * Abstract This p ap er examines the eff ectiveness of China ’s monetary p olicy in curbing the overheating and sp eculation p roblems under the current foreign exchange sy stem. The pap er stresses the necessity of capital controls in China ’s g radual f oreign exchang e ref orm and the impo rtance of credible government po licy in guiding market exp ectations. A lso, the pap er d is cusses the p ers is ten ce of Ch ina ’s ex tern a l im balan ce, a nd p rovid es po licy recommendationsf or its reduction. Key words: capital controls, China, foreign exchanges, monetary policy JEL codes:E58, F31, F41 I. Introduction The background of this research is related to continued disputes between China and its trading partners, and to the resulting international pressure on China ’s foreign exchange (Forex) system. As the fastest growing economy in the world, China ’s foreign trade has expanded at a fantastic pace and its trade surplus with the rest of the world is huge and rising. This remarkable success has encountered increasing criticism, whether correct or not, from the countries that feel they are being affected adver sely by China ’s rapid development and its current Forex policy (McKinnon, 2005). Japan has complained about China ’s exporting deflation, and the USA has accused China of taking away US j obs by * Xinhu a Gu , Assistant Pr ofessor, Facu lty of Bu siness Administr ation, Univer sity of Macau , Macau,