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The Elusive Price of Stability: Ideas and Interests in the Reform of China's Exchange Rate Regime Open Access

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What factors explain China's decision to abandon its longstanding peg to the U.S. dollar in July 2005 and replace it with an exchange rate regime permitting additional market influence, despite considerable domestic political opposition to reform? This dissertation argues that China's exchange rate reforms were driven by the confluence of China's changing self-perceptions as a responsible actor in the international system and the ideas within international financial institutions concerning exchange rate policy that emerged in the aftermath of the Asian financial crisis. These ideational factors influenced the Chinese leadership's consideration of its own interests in the long term. China's exchange rate reforms were not inevitable, and the form of China's new exchange rate regime depended heavily upon the dominant ideas concerning exchange rate policy within international financial institutions and the strategic use of those ideas within domestic political debates by the reformist leadership of China's central bank. Traditionally, explanations of the political logic of economic reform in China have focused on China's economic self-interest, elite politics, bureaucratic or institutional factors, political economy approaches focusing on the influence of interest groups, or pressure from other powerful states. Instead, the dissertation argues that "best practices" of exchange rate policy, infused with the legitimacy of recommendations from international financial institutions, including the informal consensus surrounding flexible exchange rate regimes, provided Chinese policymakers in the central bank intent on reforming China's financial system with opportunities to present financial reforms as congruent with China's emergence as a powerful and "normal" state in the international system. For observers of Chinese politics, the argument that exchange rate reform was a contingent phenomenon, and was not inevitable, casts doubt on the conventional narrative of China's economic reform and opening to the global economy. While the conventional image assumes that China is becoming incrementally more open to the rest of the world, permitting greater influence for markets each year in accordance with a long-term "grand strategy" for economic reform, this analysis of China's exchange rate reforms suggests that economic reform and liberalization in China are distinctly non-linear processes, with political factors driving the pace and direction of reforms.

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