China

China’s exchange rate policy is linked to its development strategy as China’s gradual transition from a centrally planned economy to a “socialist market economy” was accompanied with major changes in the exchange rate regime. Before the reforms, the Yuan was fixed at an overvalued rate in order to subsidize imports of capital good that could not be produced internally. Then, in 1986, a dual exchange rate system appeared: the official exchange rate was fixed by the Central bank and limited free exchanges were allowed on a parallel market. But, as the official rate was higher than the market rate, this policy disadvantages domestic exporters. In 1994, the dual exchange rate system moved to a fixed exchange rate system and a new rate was established at the market rate of 8.28 Yuan per dollar. This new regime was part of an economic stabilization plan that aimed at facing the high inflation and the credit boom. During the Asian financial crisis of 1997-1998, China kept that exchange rate regime. After the crisis, that regime was threatened by the growing capital flows in China. So, China’s Central Bank exchanged incoming dollars for Yuan at a fixed exchange rate and used the dollars to buy dollar assets. The goal of that action was to prevent the value of the Yuan from rising against the US dollar. Indeed, this regime was part of the reform program of opening China’s closed economy to trade. The aim of all that changes in exchange rate regimes was to favour China’s development and were rather successful since nominal GDP increased from 362 Yuan billions in 1978 to 13 652 in 2004 and FDI increased from zero to $64 billion annually during the same period. By 2004, China was the world’s largest recipient of FDI