According to the Unholy Trinity one country’s financial policy cannot satisfy simultaneously the goals of capital mobility, monetary policy autonomy, and exchange rate stability. Satisfying two in three goals is the most likely result. However, free circulation of capital has been treated as given under globalization. In other words, with the change in international financial structure Unholy Trinity has gradually become a financial dilemma between monetary policy autonomy and exchange rate stability.
The prevailing view regarding financial policy in authoritarian regimes is that because authoritarian regimes suffer from credible commitment problems in the international financial market and attempt to avoid time-inconsistent problem, they tend to adopt fixed exchange rate policy to stabilize exchange rate. However, China made an opposite decision when facing this financial dilemma. In 2005 China withdrew the fixed exchange rate regime to U.S. dollar and shifted to the managed floating exchange rate regime instead. In addition, in 2007, 2012, and 2014, China released the variation of trade price of Renminbi to U.S. dollar, from 3‰ to 2%. These new financial policies indicate that China disparages exchange rate stability and emphasizes on monetary policy autonomy.
With the policy mix model proposed by David Bearce this article analyzes China’s reaction to financial dilemma from the institutional impacts of the tenure system and the performance system on the policy-making of financial policy. The main argument is that the political succession institution creates an incentive for policymakers to choose monetary policy autonomy. In order to provide sufficient resources for leaders’ factional cadre members in provinces Chinese government needs more monetary policy autonomy. This reaction not only establishes factional cadre members’ political potential but also consolidates factional politics. With the data between 1994 and 2015 where China is in the process of institutionalization of political succession, we can observe the impacts of political succession institutions on the policy-making of financial policy.