Abstract:
China has been provoked into speeding renmnibi internationalization. But despite rapid growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls reinforced by financial repression in domestic interest rates to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating (appreciating) exchange rate could attract even more hot money inflows, the People's Bank of China should focus on tightly stabilizing the yuan/ dollar exchange rate to encourage naturally high wage increases for balancing China's international competitiveness.