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WORKING PAPER 05-2

China's Role in the Revived Bretton Woods System: A Case of Mistaken Identity

by Morris Goldstein, Peterson Institute for International Economics
and Nicholas R. Lardy, Peterson Institute for International Economics

Proponents of what is called the "revived Bretton Woods system" of semi-fixed exchange rates argue that we need not worry about the sustainability of either the large US current account deficit or the undervalued exchange rates of a group of Asian economies. Chinese reality undermines the case for this system, however, since the system neither describes accurately Chinese economic policy in the past nor provides sound advice about China's development strategy. Rather than seeking to promote an enclave economy based on an undervalued exchange rate and on domestic financial repression, China must expedite financial reform, liberalize interest rates, reduce reliance on administrative controls, and move toward greater flexibility in the exchange rate over the medium term.

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