China's Progression Toward Currency Convertibility : A Review and Assessment

This article takes a closer look at the process of China's foreign exchange reform since 1979. It describes major policy changes, assesses their effects, and identifies challenges in furthering the process of capital account liberalization. The paper concludes that the core of China's foreign exchange reform since 1979 has been a gradual transformation of its exchange allocation mechanism, from one that was governed by central planning to one in which market forces play a significant role. The entire reform process is characterized by substantial trade liberalization, initial official exchange-rate adjustments, exchange-market development, easing restrictions for current international transactions, and the establishment of a capital account control framework. China has moved to the last frontier of its exchange reform. Prior reforms had generally focused on the gradual liberalization of the current account and inward direct investment, aimed at strengthening the real sector and export capacity of the economy.