The Political Economy of China's Exchange Rate Policymaking in the Hu-Wen Era

Article excerpt

China's economic policymaking has become institutionalised in the post-Deng era, and policymaking has shifted from political personal authority under Mao Zedong and Deng Xiaoping towards pluralisation and institutionalisation under Jiang Zemin and the Hu Jintao-Wen Jiabao administration. It is seen as part and parcel of of market expansion and administrative decentralisation resulting from economic and political reforms. (1)

The complexity of market and political administration leads to a more sophisticated approach to economic policy formulation and implementation, requiring more professionalism in economic policymaking. The top leaders in the post-Deng era do not have the glowing reputations that the revolutionary leaders like Deng Xiaoping and Chen Yun did, and must rely on institutional rather than personal authority. The new style of economic policymaking is more corporatist than individualistic.

Exchange rate policymaking is of high importance as any adjustment in the exchange rate could influence several sectors of the domestic economy in different ways. It can also have implications for trade and capital flows in the rest of the world, thus creating the need for a high degree of policy coordination. This requires professionalism and institutionalisation in policymaking. Input into policymaking stems from specialists not only within but also outside the bureaucracy, allowing institutional actors to play a significant role in the policymaking process. (2)

The critical role of institutional actors in exchange rate policymaking lies not in their ability to determine either the policy or its implementation, but in their analyses of exchange rate policy issues and policy recommendations,

i.e., policy preparation rather than policy implementation. (3)

[FIGURE 1 OMITTED]

The making of exchange rate policy in China can be described as a three-stage process to be followed in sequence (see Figure 1). The first stage is to collect policy inputs from formal and informal sources, including institutional actors. The second stage is to process and evaluate these inputs by key policy organs before a final decision is made by decision-makers in the last stage. Bargaining among relevant key sectors of the domestic economy takes place before the final decision is reached, given that exchange rate policymaking has an uneven impact on these sectors. Compared to other arenas of economic policymaking, such as energy policy, the bargaining factor in exchange rate policymaking becomes part of policy formulation rather than policy implementation.

Exchange rate policymaking under the Hu-Wen administration is to follow the same institutional process as that in the era of Jiang, allowing for a key role played by institutional actors in policymaking. However, there is clearly a shift in the focus of exchange rate policy from export-oriented to more balanced development. The target for exchange rate policy in the Hu-Wen era is to "maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, so as to promote the basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability". (4)

Useful in understanding China's future foreign exchange reforms, this article examines the political economy of decision-making behind the formation of exchange rate policy in the Hu-Wen era. The next sections analyse structures and processes involved in China's exchange rate policymaking and the making of the 2005 new exchange rate policy through the political economy approach. The final section explores the implications for future developments in the exchange rate policy in the Hu-Wen era.

China's Exchange Rate Policymaking: Leaders, Structures and Processes

China's exchange rate policymaking mechanism from collection of policy inputs to production of policy outputs involves three major types of policy organs: ministries and other institutional actors whose inputs into policymaking are particularly influential, key policymaking organs who gather and evaluate inputs for decision-making and key decision-makers who generate the final policy outputs. …