June 19, China’s central bank announced that it will further promote the reform of RMB exchange rate formation mechanism, enhance the flexibility of RMB exchange rate.
It is worth mentioning that both the historical experience or obscure the central position, directly or indirectly, to strengthen the exchange rate mechanism reform is equivalent to RMB appreciation (both relative to the dollar, or relative to other currencies) in the view. This may not be the intention of China’s central bank, as its reason for the debt crisis in Europe, when I adjust the exchange rate mechanism, intent may be to reduce the appreciation of the RMB exchange reform is expected to post. In the current point in time, so that the RMB exchange rate (in particular the bilateral exchange rate) more flexible is a good choice, but how to control the market expectation of RMB appreciation, the exchange is the key to the success of reform.
In fact, the RMB exchange rate formation mechanism of RMB appreciation and the appreciation of the renminbi against the U.S. dollar is a different concept, but in July 2005, China’s central bank launched the “market supply and demand with reference to a basket of currencies, managed floating exchange rate system “, will confuse them.
On the one hand, exchange reform in July 2005 the beginning of a one-time revaluation of the renminbi against the U.S. dollar by 2% until July 2008 the yuan and U.S. dollar again, hard-linked the yuan against the U.S. dollar has appreciated by about 20%, this historical trajectory, enhanced exchange change is equivalent to RMB appreciation against the dollar this “adaptive expectations.”
On the other hand, in July 2005 -2 008 years in July, while the Chinese yuan relative to the euro, and a handful of baht devaluation, but the BIS statistics nominal effective exchange rate index rose by 7%, this means that period, the RMB relative to the currencies of all trading partners in the appreciation of the whole situation, but not as the yuan has appreciated relative to the U.S. dollar as significant.
So, in that China’s central bank introduced three years of “market supply and demand with reference to a basket of currencies, managed floating exchange rate system” gives the impression that it is one kind of unilateral appreciation of the yuan against the dollar, compared to All trading partners are small appreciation of the currency system. In fact, this should be a misunderstanding, and most of them are directed by the central bank itself.
At that time, the most important background of the U.S. dollar relative to other major currencies is in the down trend. If the central bank adopted a strict peg to a basket of currencies of exchange rate determination mechanism, will inevitably lead to appreciation of the renminbi against the dollar, but depreciated against other major currencies, the yuan relative to ensuring the stability of a basket of currencies. But the Chinese central bank actually used the “reference” to a basket of currencies exchange rate determination mechanism, not strictly pegged, but reference is also really knowing it to the Chinese central bank much freedom, so that a unilateral appreciation of the RMB exchange rate to road.
From the results, when the central bank may be taken in the currency basket of U.S. dollar given great weight, and then let the yuan relative to a basket of currencies Xiaobu appreciation of the strategy, which not only guarantee the RMB against the U.S. dollar would rise less ( If the dollar given the weight of 100%, equivalent to strictly pegged to the dollar), but also ensure the depreciation of other currencies relative to a lesser extent, to avoid the bilateral exchange rate volatility, but also to avoid trade frictions. However, both ways of the Chinese central bank misses the point that small step in the appreciation of the yuan revaluation is expected context.
In 2005, revaluation of the renminbi against the U.S. dollar was 2.49% (including one-off revaluation in July 2005, including 2%), in 2006, appreciated by 3.35%, 2007, in China’s central bank to float the yuan against the dollar range from 0.3% in Japan expanded to 0.5%, the RMB appreciation against the dollar as high as 6.8% in early 2008 to July 2008, has appreciated more than half as high as about 6.8%. With the financial crisis, China’s central bank hard by the renminbi-dollar linkage, the end of the appreciation of the yuan against the dollar trip.
Can be seen that before in July 2008, the RMB has appreciated against the dollar year after year, behind this is mainly intended to promote the appreciation of the renminbi, the Chinese central bank can control inflation in appreciation of the illusion, is also the default acceleration of the yuan appreciation, not only relative to the dollar, beginning in 2007, the RMB against other major currencies also began to rise. As we all know, in 2007, China has also experienced a rare asset price bubbles and inflation has not been contained.
Therefore, the re-introduction of China’s central bank with reference to a basket of currencies of exchange rate determination mechanism, the key is how to control the expectation of RMB appreciation. Now it seems that China’s central bank selected point in time is appropriate, because in December 2009, the euro depreciated against the dollar, if indeed reference to a basket of currencies, the RMB against the U.S. dollar should depreciate the trend, which is conducive to break after the reform on the RMB against the U.S. dollar is equivalent to the expected appreciation.
However, if the central bank will really do is face the international media, especially the pressure from the United States Government, the response from the market point of view, been looking after the resumption of the RMB exchange reform relative to the dollar. View from the central bank’s stance, but also hope to reform the exchange rate mechanism that could lead to upgrading the industrial structure, improve balance of payments imbalances and inflation, etc., which all require the yuan rise rather than fall through, or to implement a managed floating .
This means that the central bank in a dilemma in the moment at least, if the reference to a basket of currencies, the yuan against the dollar will face depreciation pressure; if you do not refer to a basket of currencies to short-term appreciation of the renminbi against the dollar in order to avoid public pressure, the exchange rate mechanism reform will become an empty, mean back in July 2005 -2 008 years old on the road in July, but China’s RMB exchange rate the central bank looking forward to “two-way floating,” RMB appreciation will also be expected to become self-reinforcing bubbles.
To control the expectation of RMB appreciation, China’s central bank needs to develop and carry out clear rules, and this is strictly pegged to a basket of currencies, not just in words with reference to a basket of currencies. In the strict pegging to a basket of currencies, if the currency and weights are fixed, this time while the Chinese yuan currency basket often with a “two-way floating” phenomenon, but they are predictable, and the yuan relative to the all trading partners, exchange rate stability, which is conducive to maintaining macroeconomic stability, but also conducive to restructuring in the domestic context, to maintain export competitiveness.
Perhaps the dilemma facing the central bank have to do a multiple choice is to continue to take a vague reference to a basket of currencies, the renminbi exchange rate continues to rise reluctantly under pressure from international opinion, or from longer-term interests, to adopt strict pegging to a basket of currencies, exchange rate to maintain the overall stability of the RMB, the domestic distribution of income, resources, price reform, leaving space?