China has been running a ‘crawling peg’ exchange rate regime, similar to the one Australia had between January 1976 and December 1983, since 2015. Strictly speaking, a quasi-fixed FX regime like this requires some kind of relationship between a country’s domestic money supply and its FX reserves – although that isn’t really ‘binding’ if the country is running current account surpluses or, if it is running deficits, those deficits are more than adequately covered by net foreign investment inflows (that is, its ‘basic balance’ is in surplus). Since at least the early 1990s China has been both running current account surpluses and attracting net foreign investment inflows. But its current account surplus is shrinking, and net foreign investment flows have almost completely dried up. So it’s not implausible that China could experience some kind of currency crisis in the next 2-5 years – even though it is likely to remain a net international creditor. After all, so was Japan when it experienced a currency and banking crisis in 1998. This presentation, given to economist colleagues in Independent Economics on 16th April 2024, explores the possibility.

2024-04-16 Could China Experience a Currency Crisis