The reform of China’s exchange rate regime (original) (raw)
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China's capability to control its exchange rate
China Economic Review, 2004
This paper discusses the Chinese monetary authority's capability to control the exchange rate of the Renminbi (RMB) by reviewing the key features of China's currency exchange regime. It highlights the fact that this regime not only allows the monetary authority to affect the range of exchange rate fluctuation through open market operations, but also enables it to directly influence the crucial elements of demand and supply in the foreign exchange market. In this light, we examine the recent measures taken by the authority to ease appreciation pressures on the RMB since the mid-2003.
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.
The Case for Stabilizing China's Exchange Rate: Setting the Stage for Fiscal Expansion
China & World Economy, 2009
China's financial conundrum arises from two sources. First, its large saving (trade) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead, foreign currency claims (largely US dollars) build up within domestic financial institutions. Second, economists, both American and Chinese, mistakenly attribute the surpluses to an undervalued RMB. To placate the USA, the result was a gradual and predictable appreciation of the RMB against the dollar of 6 percent or more per year from July 2005 to July 2008. Together with the fall in US interest rates since mid-2007, this oneway bet in the foreign exchanges markets not only attracted hot money inflows but inhibited private capital outflows from financing China's huge trade surplus. Therefore, the People's Bank of China had to intervene heavily to prevent the RMB from ratcheting upwards, and so became the country's sole international financial intermediary as official exchange reserves exploded. Because of the currency mismatch, floating the RMB is neither feasible nor desirable, and a higher RMB would not reduce China's trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal RMB/USD rate similar to that which existed between 1995 and 2004. However, for any newly reset RMB/USD rate to be credible as a monetary anchor, foreign "China bashing" to get the RMB up must end. Then the stage would be set for fiscal expansion to both stimulate the economy and reduce its trade surplus.
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.
Mofication of Chinese Exchange rate policy: Rationale, extent and recent development
On July 21, China slightly revalued the Renminbi and officially modified the exchange rate regime. Interpreting this move as only the outcome of international pressures to reduce international trade imbalances is however misleading. To support our argument, we explore the rationale of the July 21 decision in the history of exchange rate management in China, and through the review of the twin debates of exchange rate level / regime. We argue that both external and internal concerns are took into account by Chine authorities in the exchange rate management. Moreover, the entire responsibility of Chinese exchange rate management in the world trade imbalances is doubtful. The review of the recent development since the July 21 shows that the impact of July 21 decision is limited. While the hot money inflows seems to have been tamed, the previous economic trends have not been modified to date.
We study the renminbi (RMB) central parity formation mechanism following the August 2015 reform. Statistical models are formulated to assess the linkages between the central parity and the alternative variants of the RMB exchange rate, market volatility and selected control variables. In a linear regression framework, we identify the roles of the onshore and offshore RMB exchange rates and the US dollar index, but not the RMB currency basket index. However, the marginal effect of the RMB index is revealed via a multiplicative interaction model that incorporates a condition variable given by the volatility of the offshore RMB market. The offshore RMB volatility exerts a dampening effect on the links between the central parity and its determinants, reflecting that Chinese authorities do not hesitate to adjust their policy actions under threat of high volatility.
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.
RMB revaluation will serve China's self-interest
2004
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. D 2004 Elsevier Inc. All rights reserved. JEL classification: F31; F41
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.