Assessing the Appropriateness of China’s Peg to the US Dollar

This paper attempts to assess the compatibility of China with its present dollar-based exchange rate policies. Assessment is made in terms of the real convergence criteria suggested by the optimum currency areas (OCA) theory and the nominal convergence criteria specified by the Maastricht Treaty. In light of the endogeneity view of convergence criteria, the relevant features of China are evaluated against economies implementing rigid dollar standards in practice, namely Hong Kong, Macau, and Panama. Results suggest that conditions in China are at least as conforming as those prevailing in the reference economies.