What Monetary Policy Does China Need?

China’s remarkable growth has been financed recently by a rapid expansion of money and bank credit that is producing an increasingly unsustainable investment boom. This renews concerns that the country may not be able to avert a replay of the painful boom–and-bust cycle such as the one it endured in the mid-1990’s.

Monetary policy is usually the first line of defense in such situations. But China’s monetary policy has been hamstrung by the tightly managed exchange-rate regime. This regime prevents the central bank – the People’s Bank of China (PBC) – from taking appropriate policy decisions to manage domestic demand, because interest-rate hikes could encourage capital inflows and put further pressure on the exchange rate.

There is, of course, a vigorous ongoing debate about China’s exchange-rate policy. China’s rising trade surplus has led some observers to call for a revaluation of the renminbi to correct what they see as an unfair competitive advantage that China maintains in international markets. Others argue that the stable exchange rate fosters macroeconomic stability in China. But this debate misses the point.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.


By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in


Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.