Modelling the Transition Towards the Renminbi's Full Convertibility: Implications for China's Growth

Abstract

There is a widespread consensus that China needs to rebalance its export-driven growth paradigm towards a more consumption-based one and that such process is to be accompanied by the transition towards the renminbi's full convertibility. However, the Chinese authorities have so far acted with great caution because this transition cannot but accelerate the slowdown of China's growth which will likely occur because of other structural factors. We address these issues by means of a twocountry two-stage (before and after the renminbi's full convertibility) model, which reproduces some qualitative features of China's growth pattern and its relationship with the United States. We analyse the extent to which altering the Chinese exchange rate regime, as well as other policies affecting sensitive social and economic issues, may impact on the short-, medium-and long-term evolution of the Chinese economy. The paper shows that by lifting the controls on the capital account and letting the currency float, the Chinese authorities will renounce those policy instruments for controlling the allocation of the national resources and the dynamics of China's economy.

An inquiry into exchange rate misalignments as a cause of major global trade imbalances

“…On this aspect, empirical studies by Bahmani-Oskooee and Gelan (2013) on African countries also reported mixed results. Although Bonatti and Fracasso (2016) cautioned that by lifting the capital control and free float of Renminbi will restrict the Chinese authorities’ ability of market intervention and resource allocation, one cannot dispute that the choice of the exchange rate regime is purely a sovereign nation’s internal affair. In principle, the point of argument could be the issues around competitive devaluation due to the beggar-thy-neighbour consequences.…”