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This paper reviews the issues involved in moving towards greater exchange rate flexibility and capital account liberalization in China. A more flexible exchange rate regime would allow China to operate a more independent monetary policy, providing a useful buffer against domestic and external shocks. At the same time, weaknesses in China’s financial system suggest that capital account liberalization poses significant risks and should be a lower priority in the short term. This paper concludes that greater exchange rate flexibility is in China’s own interest and that, along with a more stable and robust financial system, it should be regarded as a prerequisite for undertaking a substantial liberalization of the capital account.

Exports and Imports --- Foreign Exchange --- Current Account Adjustment --- Short-term Capital Movements --- International Investment --- Long-term Capital Movements --- Currency --- Foreign exchange --- International economics --- Exchange rate flexibility --- Capital controls --- Capital account liberalization --- Capital account --- Exchange rate arrangements --- Balance of payments --- Capital movements --- China, People's Republic of