Balance of payments and currency policy in China’s development

• China’s development strategy as both market- and state-driven. • The role of balance of payments management in China’s development strategy. • Currency manipulation and global imbalances: could China’s authorities have played a more active role in rebalancing international trade relationships by adopting a less interventionist approach to keeping the exchange rate artificially low against the dollar?. • A model to assess the “market exchange rate” of the Renminbi during the fixed exchange rate regime (1994–2025). • The model suggests that, during the period of limited financial account liberalization, unpegging the Renminbi from the US Dollar would have been challenging. This paper offers a summary and evaluation of China’s development strategy over the past four decades, focusing on its transition to an open economy. On the one hand, it underscores the role played by international trade and the shift from central planning to market-driven resource allocation. On the other hand, it highlights the role of active government intervention, particularly in managing the balance of payments and contributing to China’s success. The paper also addresses the controversies surrounding China’s exchange rate policy, including accusations of “currency manipulation”. The model presented suggests that the scope for a quick nominal revaluation of the Renminbi with respect to the US dollar during the initial stages of the reform era was limited. This finding contributes to a more informed and evidence-based discussion on international macroeconomic imbalances.