CHINA'S EXCHANGE RATE SYSTEM REFORM

This paper first documents the rationales behind the transitional exchange rate system reform adopted by China on 21 July 2005. It then outlines the theory behind the medium- and long-term exchange rate arrangements that could be adopted. Thereafter, the paper provides recommendations on supplementary packages that could increase the chance of a successful reform, and increase China's immunity and resilience against financial crises in the future. Finally, the paper discusses the market and economic developments after the transitional reform, and highlights that failure to check the stock market bubble and rampant property inflation could turn the initial success of the reform to an eventual failure and bring disasters to China in the longer future.