China has tried to correct the imbalances in its external sector in a number of ways, but all the efforts have failed to address the direct cause of the rapid increase in foreign exchange reserves. To stop the accumulation of reserves and thus minimise China's welfare and capital losses, the simplest solution would be for the People's Bank of China to end intervention in the foreign exchange market. Ending central bank intervention in currency markets is a complex issue. But the economic and welfare costs of China's slow pace in adjusting the exchange rate are very high and will only increase by the day. It is time for China to consider allowing the yuan to float freely, while reserving the right to intervene when it must, and tighten the management of cross-border capital flows which has become permissible under the Group of 20's agreements.
