Abstract:
The paper argues that China's capital controls remain substantially
binding. This has allowed the Chinese authorities to retain some
degree of short-term monetary autonomy, despite the fixed
exchange rate up to July 2005. Although the Chinese capital
controls have not been watertight, we find sustained and significant
gaps between onshore and offshore renminbi interest rates and
persistent dollar/renminbi interest rate differentials during the period
of a de facto dollar peg. While some cross-border flows do respond
to market expectations and relative yields, they have not been large
enough to equalise onshore and offshore renminbi yields.
JEL classification: F31, F32, F36, G15, G18
Keywords: Foreign exchange market, capital flows, capital controls, monetary policy, financial stability and the Chinese economy.