RMB revaluation will serve China's self-interest (original) (raw)

RMB revaluation will serve China's self-interest

China has operated its exchange rate regime as a de-facto peg to the dollar since the devaluation of August 1994. Given the stunning growth in foreign exchange reserves in 2003, this paper argues that the optimal currency adjustment is a one-time maxi revaluation of roughly 15% versus the U.S. dollar to a new fixed rate but to a modified anchor, that is, a trade-weighted currency basket. Once the currency was repegged and the new reference basket was implemented, any additional moves, such as widening the trading band, could be phased during a transition period of some years, providing a safe and effective path to a more flexible exchange rate regime in the medium to long term.

The Renminbi's Dollar Peg at the Crossroads

Center For International and Development Economics Research, 2006

In the face of huge balance of payments surpluses and internal inflationary pressures, China has been in a classic conflict between internal and external balance under its dollar currency peg. Over the longer term, China's large, modernizing, and diverse economy will need exchange rate flexibility and, eventually, convertibility with open capital markets. A feasible and attractive exit strategy from the essentially fixed RMB exchange rate would be a two-stage approach, consistent with the steps already taken since July 2005, but going beyond them. First, establish a limited trading band for the RMB relative to a basket of major trading partner currencies. Set the band so that it allows some initial revaluation of the RMB against the dollar, manage the basket rate within the band if necessary, and widen the band over time as domestic foreign exchange markets develop. Second, put on hold ad hoc measures of financial account liberalization. They will be less helpful for relieving exchange rate pressures once the RMB/basket rate is allowed to move flexibly within a band, and they are best postponed until domestic foreign exchange markets develop further, the exchange rate is fully flexible, and the domestic financial system has been strengthened and placed on a market-oriented basis.

On the Chinese Exchange Rate Regime: An Attempt to Flexibility During 2015

2019

This study will demonstrate, through an econometric and asset allocation approach, if and how the Chinese exchange rate regime was changing during 2015. Particularly, China to improve its exchange rate formation system implemented, during July and August 2015, three depreciation as a step toward a market-oriented exchange rate. This situation, along with the new right of the RMB to be an international currency in SDR should generate a loss of weight about the USD in the Chinese basket peg. For this reason, moving from Frankel-Wei's basic econometric model-but with some appropriate changes-our objective is to verify if the Chinese monetary policy about the exchange rate has affected the inner balance of the Chinese basket-peg leading it towards a flexible exchange rate regime.

Structural Effects of a Real Exchange Rate Revaluation in China

2000

The misalignment of the Chinese currency exposed by the rapid build-up of China's foreign exchange reserves over the past few years has been the subject of considerable recent debate. Recent econometric studies suggest a Renminbi undervaluation on the order of 10 to 30%. The modest revaluation of July 2005 is widely perceived as insufficient to correct China's balance-of-payments disequilibrium and

Dynamic Transition of Exchange Rate Regime in China

China & World Economy, 2014

The paper considers the optimal transition path for China's exchange rate regime. How can China successfully make the shift from the current dollar peg regime to a more desirable regime, whether a basket peg or a floating regime? To answer this question, we develop a dynamic small open economy general equilibrium model. We construct four transition policies based on a basket peg or a floating regime and compare the welfare gains of these policies relative to maintaining the dollar peg regime. Two main results are derived from the quantitative analysis using Chinese data from 1999Q1 to 2010Q4. First, following a gradual adjustment to a basket peg regime is the most appropriate path for China to take, with minimal welfare losses associated with the shift in the exchange rate regime. Second, a sudden shift to the basket peg is the second best solution, and is superior to a sudden shift to floating because the monetary authority can efficiently determine optimal weights to attach to currencies in the basket to achieve policy goals once they adopt a basket peg regime.

Reforms of China’s exchange rate regime and the renminbi internationalization

Ekonomia i Prawo

Motivation: After four decades of very successful reforms, China has become one of the largest economies in the world. An important area of these reforms is the exchange rate system and monetary policy, which over the years has complied with economic objectives, in particular the promotion of economic growth by improving export competitiveness. The progressive liberalisation of the Chinese economy and its ever closer integration into the world economy require this policy to be adapted to changing circumstances. Aim: The aim of the article is to analyze China's exchange rate policy from the perspective of the dilemma of choosing between using this policy to support export competitiveness and striving to internationalise the renminbi. Moreover, the author assesses the consequences of this policy for China's economy and for the world economy. The study includes theoretical research (analysis of the literature and research reports) and empirical research (analysis of statistical data) using a descriptive analysis. Results: For many years China's exchange rate policy has been focused on supporting economic growth by improving export competitiveness, resulting in both increasing internal imbalances and difficulties in stabilising inflation, as well as the accumulation of global payments imbalances. Since 2005 China has made its currency more flexible, so that the underestimation of the renminbi's exchange rate has decreased. In recent years, China has intensified its efforts to support the internationalisation of the renminbi. However, the renminbi is not yet in rivalry with the US dollar as the dominant international currency, although the Chinese currency's share as an international currency is increasing, which should have a positive impact on the stability of global financial relations.

The Renminbi’s Dollar Peg at the Crossroads

2006

In the face of huge balance of payments surpluses and internal inflationary pressures, China has been in a classic conflict between internal and external balance under its dollar currency peg. Over the longer term, China’s large, modernizing, and diverse economy will need exchange rate flexibility and, eventually, convertibility with open capital markets. A feasible and attractive exit strategy from the essentially fixed RMB exchange rate would be a two-stage approach, consistent with the steps already taken since July 2005, but going beyond them. First, establish a limited trading band for the RMB relative to a basket of major trading partner currencies. Set the band so that it allows some initial revaluation of the RMB against the dollar, manage the basket rate within the band if necessary, and widen the band over time as domestic foreign exchange markets develop. Second, put on hold ad hoc measures of financial account liberalization. They will be less helpful for relieving exc...

Renminbi Exchange Rate: Peg to A Wide Band Currency Basket

China & World Economy, 2017

Persistent renminbi (RMB) devaluation expectations are one of the greatest threats to China's macroeconomic stability. Market interventions backed by huge foreign exchange reserves and capital controls are not suffi cient to eliminate the expectations of devaluation. Creating a market-based and fl exible RMB exchange rate regime holds the key to the elimination of devaluation expectations. The present paper compares the pros and cons of several policy options, and proposes to introduce, as a transition to free fl oating, a new exchange rate regime pegged to a currency basket with a wide band. The new regime should be able to give the RMB exchange rate enough fl exibility to eliminate devaluation expectations as well as prevent excessive overshooting. To ensure a smooth transition, the new regime needs to be supported by controlling cross-border capital fl ows.