The political obstacles to greater exchange rate flexibility in China

SummaryAn undervalued currency has arguably helped China pursue an East-Asian style export-led model of development, spurring economic growth and job creation. Recently, however, the undervalued exchange rate has exposed China to a raft of growing major financial and economic vulnerabilities, including an overheating of the domestic economy and renewed financial sector difficulties. Despite these risks, Chinese leaders have refused to significantly revalue the renminbi, suggesting that political objectives are taking precedence over economic optimality. I aim to glean insight into such political explanations by building upon present theories in political economy.