International financial adjustment is the process whereby valuation shifts from asset price and currency changes result in relatively durable net wealth transfers across countries’ international balance sheets.This paper applies a financial valuation approach to estimate the direction and the broad extent of recent international financial adjustments on China’s international balance sheet.We estimate China’s international balance sheet losses resulting from the valuation shifts over the period 2005-2010 and reveal that international currency shifts over the past decade have also generated a range of non-balance sheet financial and monetary adjustment pressures for China.This paper also evaluates how China’s evolving international financial policy arrangements could better mitigate China’s exposure to international financial adjustments.These arrangements include a more effective currency mechanism and the mechanisms to internationalize the RMB to buffer international financial valuation shocks.
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