Exchange Rate Reform in China : An Experiment in the Real Targets Approach

Evolution of China's exchange rate policy in the reform years provides a prime example of a reform that transformed the role, adjustment rules, and the institutional arrangement of the exchange rate in a country where once the exchange rate was arbitrarily set, functioned as a mere accounting device, and lay in fixed rigidity. The reform is essentially an experiment in the real targets approach to exchange rate policy that has afforded a realistic exchange rate, allowed freer access to foreign exchange, and introduced market forces in exchange rate decisions. Such a reform has laid foundation for China to pursue a realistic exchange rate policy. Its success derives in the main from a sensible sequencing, the consistent and strong emphasis placed on boosting supply, carefully handling the inflationary pressure with an appropriate policy assignment, and viewing the credibility issue in its broad effects