Rmb Appreciate

The World Economy (2009) doi: 10.1111/j.1467-9701.2009.01191.x

Excess Liquidity, Inflation and the Yuan Appreciation: What Can China Learn from Recent History?

THE Original Publishing XXX YUAN © 2009 Article 1467-9701 0378-5920 Author Ltd World UK APPRECIATION TWECEconomy Oxford, TheZHANGJournal compilation © Blackwell Publishers Ltd. 2009 CHENGSI Blackwell

Chengsi Zhang

Renmin University of China

with paper analyses inflation measures to rein-in inflation and and the United States and reveals marked changes China. In mapping over recent years. Associating these findings with the evolving appreciation of the yuan against the dollar, the paper advises a slowdown in dramatic capital inflows, is a Instead of quick appreciation, price inflation in China during the in decade. exchange rate article combined This alternative capital control and excess rates between liquidity and curb ongoing inflation in currently evolving in in their differentials the co-movement between excess liquidity and inflation and developing a dynamic model, the paper shows that excess liquidity, ignited by the rate of RMB appreciation.significant driver for consumer the paper proposes more flexibilitylastthe RMB In addition, theregime compares ABSTRACT paths of the issues of interest liquidity, excessChina the exchange rate appreciationChina. the dynamic

1. INTRODUCTION

R

APID economic growth in China since the early part of the last decade has been accompanied by a surge in foreign capital inflows through the so-called ‘twin surpluses’ in both current and capital accounts, although flows of foreign direct investment (FDI) continue to predominate. In addition, low interest rates in mature markets have driven the capital flows to China, as have improved macroeconomic fundamentals in the Chinese economy, as well as financial innovation and gradual liberalisation on international capital markets, which have promoted increased mobility of global capital flows. The large capital influx has ignited...