Brookings Institution Interpretation Of RMB Exchange Rate Reform Strategy

< p > in February this year, the central bank [micro-blog] unexpectedly dominated the "a href=" //www.sjfzxm.com/news/index_cj.asp "RMB > /a" after the depreciation of the exchange rate. It seems that market participants have had a great divergence on the future trend of the RMB exchange rate.

The United States think tank Brookings Institution believes that this means that RMB exchange rate management has entered a new stage: < /p >

< p > obviously, China has entered a new stage of exchange rate management, and the rules that have been well functioning since 2005 have been greatly adjusted.

Two facts prove this judgement.

First, the main goal of RMB appreciation policy has been achieved.

The current account surplus has almost been eliminated. At least, according to recent findings from the Peterson Institute for international economics of the US think tank, the structural undervaluation of the renminbi has disappeared.

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< p > Second, expanding the RMB to us dollar trading price within 2% days means that the RMB exchange rate can be determined by the market for most of the time (because the exchange rate will fluctuate more than 2% within a day only under extreme market pressure).

This development seems to be in line with the goal of reform announced at the Third Plenary Session of last November - to allow the market to be "decisive" in the allocation of resources.

Allowing the RMB exchange rate to float more freely is also in line with the public timetable for the deposit interest rate liberalization in the next two years, which means that the main goal of monetary policy will be shifted from exchange rate to the direction of interest rate mainly for domestic money market.

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< p > however, it is also obvious that < a href= "//www.sjfzxm.com/news/index_cj.asp" > Central Bank "/a" will not simply allow the RMB exchange rate to float freely: a href= "//www.sjfzxm.com/news/index_cj.asp" > floating "/a" will be strictly managed floating.

In terms of mechanism, it will probably be similar to the "basket, wave and crawling" mechanism of Singapore dollar. There is a target of trade weighted index which is not published. The fluctuation within 2% limits the extreme volatility, and periodically reassess the management interval to prevent major deviation in currency exchange rate.

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< p > strategically speaking, the two major objectives of China's exchange rate mechanism will be to maintain the stability of current account and capital account while providing support for the RMB to become an important international currency.

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< p > the first factor basically means that when capital inflows (outflows) threaten stability, the central bank will use the exchange rate to reverse this capital flow, and can also operate when the current account fluctuates extremely.

In fact, Beijing will try to maintain the balance of the two parts of the balance of payments and deepen reform of the domestic economy at the same time.

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< p > second means that continued depreciation is unlikely to be tolerated, because the international currency "new" Renminbi still needs to convince international investors, which is a reliable means of value preservation in the medium and long term.

There is no contradiction between the failure to accept sustained depreciation and the sharp depreciation of the market over a period of months or even longer.

The days of one-way speculation in Renminbi appreciation are over.

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