The International Political Economy of China’s Exchange Rate Policy Making

This book examines the international political economy of China’s exchange rate policy making from theoretical and empirical perspectives. It identifies the limitations in the existing Economics studies on the RMB exchange rate and the research gap of the Comparative Political Economy (CPE) and International Political Economy (IPE) approaches to exchange rate politics. The author develops a three-level game framework for China’s exchange rate policy making based on revision and synthesis of the existing CPE and IPE approaches, which provides a richer portrait of the dynamism and complexity of China’s exchange rate policy making. The book has applied the three-level game framework to empirically analyzing China’s exchange rate policy making under the Hu-Wen administration. The book also discusses some further exploration of China’s exchange rate policy in the Xi era and comparative case study of exchange rate policy making. It is a timely and rigorous study on the role that international and domestic politics play in forging China’s exchange rate policy making in the twenty-first century. Acknowledgements Contents Abbreviations 1 China’s Exchange Rate Policy Making: An Introduction 1.1 Research Background 1.2 State of the Field 1.3 The Nature of China’s Politics 1.3.1 Jiang Zemin’s Legacy 1.3.2 China’s Politics in the Hu-Wen Era 1.4 Theoretical Framework and Empirical Findings in Brief 1.4.1 Origins of the 2005 Exchange Rate Reform, from 2002 to July 2005 1.4.2 Gradual Development of Exchange Rate Reform, from July 2005 to 2007 1.4.3 Acceleration and Stagnation of Exchange Rate Reform, from 2008 to July 2010 1.4.4 Resumption of Exchange Rate Reform, from July 2010 to 2013 1.5 Methods 1.5.1 Documentary Analysis 1.5.2 Case Study Supplemented by Questionnaires and Interviews 1.5.3 Elite/Expert Interviewing 1.6 Contributions and Outline of the Book 2 Literature Review and Theoretical Framework 2.1 Inconclusive Economics Studies on the RMB Exchange Rate 2.1.1 The Purchasing Power Parity Approach 2.1.2 The Fundamental Equilibrium Exchange Rate Approach 2.1.3 The Behavioral Equilibrium Exchange Rate Approach 2.2 Summary and Discussions 2.3 Critical Review of CPE and IPE Studies on Exchange Rate Politics 2.3.1 The Domestic Interests Approach 2.3.2 The Domestic Institutions Approach 2.3.3 The International Influences Approach 2.3.4 The International-Domestic Interactions Approach 2.4 Summary and Discussions 2.5 Theoretical Framework of China’s Exchange Rate Policy Making 2.5.1 Two-Level Game in Comparison to Neoclassical Realism 2.5.2 Conceptualizing the External Influences on China’s Exchange Rate Policy Making 2.5.3 Opening the Black Box: The Domestic Sources of China’s Exchange Rate Policy 2.5.4 Extending the Two-Level Game: Three-Level Game of China’s Exchange Rate Policy Making 2.5.5 Concluding Remarks 3 The RMB Depeg from the US Dollar, 2003–2005 3.1 The Emergence of Congress Pressure in 2003 3.2 The US Administration’s Engagements with China, 2003–2004 3.3 PBOC as an Outspoken Advocate for Exchange Rate Reform 3.4 MOFCOM as a Powerful Opponent of Exchange Rate Reform 3.5 Re-Emergence of External Pressure on RMB Undervaluation in 2005 3.6 China’s Internal Political Struggle Before 21 July 2005 3.7 Explaining the Outcome: China’s Exchange Rate Reform on 21 July 2005 4 The Faltering RMB Exchange Rate Reform, 2005–2007 4.1 Softened International Pressure from July 2005 to 2006 4.2 MOFCOM’s Sustained Resistance Against RMB Appreciation, 2005–2006 4.3 PBOC’s Increasing Policy Dilemma 4.4 Re-emergence of External Pressure for Accelerated RMB Appreciation in 2007 4.5 MOFCOM’s Shifted Priority in 2007 4.6 PBOC’s Advocate for Exchange Rate Flexibility and Appreciation in 2007 4.7 All-In to Fight Inflation 4.8 Concluding Remarks 5 The Back and Forth of RMB Exchange Rate Reform in Turbulent Times, 2008–2010 5.1 The International and Domestic Context in 2008 5.2 Exporters Got into Trouble and Fought Back 5.2.1 Evidence from Questionnaire Surveys 5.2.2 Evidence from Semi-Structured Interviews 5.2.3 Guanxi-Based Lobbying Through Local Governments 5.2.4 Guanxi-Based Lobbying Through Local Offices of Central Governmental Agencies 5.2.5 Lobbying Through Trade Associations 5.3 The Top Leadership Concerned 5.4 Stagnation of RMB Exchange Rate Reform, July 2008 to June 2010 5.5 Implications of Exchange Rate Reform Stagnation 5.6 Concluding Remarks 6 The Resumption of RMB Exchange Rate Reform and the Internationalization of RMB, 2010–2013 6.1 The Mixed External Influence on the RMB Issue, 2008–2010 6.1.1 Congress’s Influence on the RMB Issue Diminished 6.1.2 Treasury’s and IMF’s Pressure on the RMB Issue Intensified in 2010 6.2 China’s Response to the External Pressure on the RMB Issue in 2010 6.2.1 Standing Firm to the External Pressure 6.2.2 MOFCOM and PBOC in the Same Boat 6.2.3 The Chinese Leadership More Consistent in the Exchange Rate Reform Policy 6.3 The RMB Exchange Rate Reform and the Internationalization of RMB, 2010–2013 6.3.1 The Origins of RMB Internationalization 6.3.2 Towards RMB Internationalization 6.3.3 Explaining the RMB Exchange Rate Reform Under the Context of RMB Internationalization 6.3.4 Alternative Explanations 6.4 Concluding Remarks 7 Conclusion 7.1 Theoretical Framework and Empirical Findings 7.2 The Bigger Picture: China’s Exchange Rate Reforms and the Nature of China’s Politics 7.3 Directions for Future Research 7.3.1 China’s Exchange Rate Policy in the Xi Era 7.3.2 Comparative Studies of Exchange Rate Policy Making Appendix A US Congress Bills on the RMB Issue, 2003–2013 Appendix B PBOC’s Open Market Operations, 2004–2013 Appendix C Adjustments of Required Reserve Ratio (RRR), 2001–2013 Appendix D Semi-structured Interview Questions Semi-structured Interview Questions—Elites/Experts at Beijing Semi-structured Interview Questions—Officials of Local Government and Branches of MOFCOM Semi-structured Interview Questions—Local Export Entrepreneurs Appendix E The Development of RMB Internationalization—International Use of RMB in Trade and Investment, 2009–2013 Appendix F The Development of RMB Internationalization—Bilateral Currency Swap Agreements Between the PBOC and Other Central Banks or Monetary Authorities, 2009–2013 References Index