Chinese Monetary and Exchange System Reform - Dissertation Example

There are many doubts over the government’s claims of effective capital controls and the proofs of “hot money” tell a very different story. The bigger openness of economy will certainly create an environment of tension with the China's closed capital account. The country must put in place a strong institutional framework and a solid financial infrastructure. These are very necessary measures for accommodating freedom of cross-border capital flows and can provide China chances of making meaningful progress in banking reform in the next three to five years.

During the last two years, China’s currency current account surplus registered a rapid increase, showing an increase of 817 billion dollars (or 1.5 percent) of gross domestic product in 2001 to 46 billion (or 3.2 percent) of gross domestic product in 2003. Its currency remains depreciated by nearly all metrics. The country ran a trade surplus of 32 billion dollars in 2004 compared with a surplus of about 25.5 billion dollars in 2003. For two causes, however, the fundamental recent account surplus in the years 2003 and 2004 is merely about undoubtedly significantly higher than the calculated surplus.

The first cause, the economy of the country has been growing fast, at a record-setting but clearly flawed pace. High growth has encouraged an unprecedented demand for imports, which showed a rise of 40 percent in 2003, making the country third largest importer of world. In 2004 imports registered an additional increase of 36 percent. cent. While China's economic growth ultimately slows to a more sustainable pace, it is quite likely that import growth will slow down relative to the growth of exports and in result trade surplus of the country will how wide gap.

Amid 1990 that was the prototype in the final macroeconomic cycle when the trade accounts reinforced considerably. The second cause, mainly because of the peg of Chinese currency Yuan to the US dollar, the real trade-weighted value of the Chinese Yuan has