Since the Asian crisis, the merit of the Chinese government's de facto peg to the US Dollar has been the subject of widening debate. This paper reviews the issues surrounding China's currency regime choice and assesses the case for greater flexibility. Reform era exchange rate policies are examined along with the performance of the economy during and since the Asian crisis. In the Chinese context, the arguments for and against fixed exchange rates are then explained and assessed. Finally, an elemental comparative static macroeconomic model is used to examine the implications of domestic and external shocks under different exchange rate regimes and with differing degrees of capital mobility. The results support the view that more flexibility would be beneficial to China and that this benefit can be expected to increase as capital mobility increases.

This paper considers interactions between China's domestic and external imbalancesand their global implications. We present scenarios detailing how a rebalancing of China's growth pattern from investment-driven growth towards more consumption-driven growth may occur in practice. Using input-output tables for 2012, we illustrate the knife-edged nature of Chinese rebalancing, the linkages between expenditure-side and production-side rebalancing, and how an internal rebalancing could exacerbate external imbalances. A policy implication for China is that for rebalancing to be fast, consumption must be exceptionally resilient and the effi ciency of investment must increase sharply. If rebalancing is too slow, the capital-to-output ratio will rise to potentially unsustainable levels and consumption will fail to attain levels of contemporary upper middle-income economies by 2030. Global input-output tables (1995Global input-output tables ( -2011 suggest that the patterns of Chinese rebalancing considered in our scenarios may generate substantial headwinds for exports to China by its trading partners.

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