We thank Tim Reichardt und Axel Löffler for excellent research assistance.
China and Its Dollar Exchange Rate: A Worldwide Stabilising Influence?1
Article first published online: 28 FEB 2012
© 2012 Blackwell Publishing Ltd
The World Economy
Volume 35, Issue 6, pages 667–693, June 2012
How to Cite
McKinnon, R. and Schnabl, G. (2012), China and Its Dollar Exchange Rate: A Worldwide Stabilising Influence?. World Economy, 35: 667–693. doi: 10.1111/j.1467-9701.2011.01416.x
- Issue published online: 18 MAY 2012
- Article first published online: 28 FEB 2012
China is criticised for keeping its dollar exchange rate fairly stable when it has a large trade (saving) surplus. This criticism is misplaced in two ways. First, no predictable link exists between the exchange rate and the trade balance of an international creditor economy. Second, since 1995, the stable yuan/dollar rate has anchored China’s price level and facilitated counter cyclical fiscal policies that have smoothed its high real GDP growth at a remarkable 9 to 11 per cent per year. With its now greater GDP, China displaces Japan as the largest economy in East Asia – but with a much stronger stabilising influence on East Asian neighbours from its higher economic growth and more stable dollar exchange rate. Now, an ever larger China is an essential stabiliser for the world economy – as exemplified by its prompt and effective fiscal response to the global credit crunch of 2008–09. However, cumulating financial distortions – in China and the United States – threaten to undermine China’s growth and its stabilising influence on the rest of the world.