Leave a reply
To Accomplish the Unaccomplished Reform: Lessons and Options of RMB Exchange Rate Reform
Yu Yongding (余永定) and Xiao Lisheng (肖立晟)
Chinese Academy of Social Sciences (CASS), Beijing, China
Institute of World Economics and Politics, CASS
Abstract: The exchange rate reform initiated on August 11, 2015 is an important attempt by
the PBoC to transform China’s exchange rate regime from the “crawl-like arrangement” to
a floating regime. However, after a three-day experiment, the PBoC abandoned the original
goal of the reform. Since then, the central bank has implemented a new exchange rate-setting
mechanism. Under this mechanism, the central parity of the renminbi (RMB) against the US
dollar is decided by the arithmetic average of the RMB exchange rate that keeps the index of a
currency basket unchanged over the past 24 hours and the previous day’s closing price of USD/
CNY. Due to the introduction of the index of a currency basket, additional uncertainty has been
introduced into the determination of the RMB exchange rate, because of the uncertainty of the
dollar index (USDX). As a result, to a certain extent, the one-way bet on the RMB expectations
is weakened. However, the current exchange rate formation mechanism cannot reverse the
trend of devaluation of the RMB, nor can it eliminate depreciation expectations. Meanwhile, it
hinders the effectiveness of central bank’s independent monetary policy based on the domestic
economic fundamentals. And also, the “two-way float” created by the new price-setting
mechanism is artificial and has led to significant losses of foreign exchange reserve. The paper
explains how the new price-setting mechanism works, and identifies the important features of
the mechanism and its pros and cons. The paper argues that despite some advantages, the new
exchange rate regime as a soft peg regime is not sustainable and the PBoC should stop foreign
exchange market intervention as soon as possible. We hope that the PBoC can learn the lessons
from the failure of the “August 11 reform” and accomplish the unaccomplished reform in an
urgent manner.
Keywords: “August 11 reform”, reform of the RMB exchange rate regime, intervention in
the foreign exchange market, currency basket
JEL Classification: F31, F32, F38
¥0.01加入购物车
