Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79450
Authors: 
Sen, Sunanda
Year of Publication: 
2013
Series/Report no.: 
Working Paper, Levy Economics Institute 761
Abstract: 
The recent declines in China's financial account balance ended the twin surplus era and led to a modest decline in the stock of official reserves, which reflects a reversal in expectations for the Chinese currency. Negative balances, which have been visible in China's financial balances since the last quarter of 2011, have heightened fears/anxiety in markets. These deficits stand in sharp contrast to the typical financial account surplus that existed until 2010. The announcement in September 2011 by Chinese monetary authorities of a two-way floating RMB in the foreign exchange market has unsettled market expectations and has led to a sharp fall in the financial balance. The latter brought a change in the expectations regarding the RMB-USD exchange rate. This change was reflected in the drop in foreign exchange assets, which was caused by a jump in short-term trade credits to prepay (for imports) in dollars, a rise in dollar advances from banks, and a withdrawal of dollar deposits. These changes have, of late, been a cause of concern relating to the future of China's economic relations vis-à-vis trading and financial partners, which include the United States. The experience of China, in a changing world beset with deregulation and with speculation affecting her external balance in recent years, provides further confirmation of John Maynard Keynes's observation, in 1937, regarding uncertainty in markets: About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.
Subjects: 
China
financial balances
official reserves
twin surpluses
rebalancing
expectations
internationalization
managed exchange rate
JEL: 
E31
E34
E52
F42
O16
O53
Document Type: 
Working Paper

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