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On December 8, 2004, Premier ^^ clearly pointed out at the 7th Session of the Central European Leader Summit: the marketlization of RMB exchange rate reform is our established policy. However, some factors should be taken into account while we exercise the elastic RMB exchange rate regime: firstly China’s microeconomy remains stable; market economic system is perfect and the financial system is sound; secondly there should be a scientific solution so as to ensure the sustainable and sound development of China’s economy; thirdly, the impact of the neighboring countries should be taken into consideration; and last, China should be reliable for the neighboring countries and for the whole world.
On June 26, 2005in view of the demand made by the American Congress and Treasury Department, strongly requiring that RMB exchange rate be appreciated within 6 months, Premier ^^ reiterated the Chinese Government’s attitude at ASEM Finance Ministers Meeting held in Tianjin. In addition to reaffirming that the reform of RMB exchange rate is China’s internal policy, he continued to emphasize that this reform entailed some qualified conditions. He further pointed out that the reform of RMB exchange rate regime must follow the overall strategy of initiative, controllability and gradual progress. He continued, “The so-called initiative is based on the demand of China’s reform and economic development and the manners, contents and opportunity determining the exchange rate reform. Exchange rate reform entails full consideration of the affecting factors like the stability of the microeconomy, economic growth and employment and the financial system and financial supervisory level and the neighboring countries and regions and the world economic and financial impact should be taken into consideration. Here the controllability means that the change of RMB exchange rate should be brought under the macro-management control, thus ensuring that the reform can be further promoted but not out of control, and avoiding there appearing violent fluctuation of the financial market and economic convulsions. Gradual progress means that the reform should be carried out in a planned and systematic way, which requires us not only to consider the current demands but also the long-term development, so we can’t be overanxious for quick results”.
So far, as for all the problems concerning the reform of the RMB exchange rate system, including the objectives, conditions, manners and specific procedures, the Chinese government has given a comparatively clear reply.
II. Processes and contents of the reform
On July 21, 2005 the People’s Bank of China published a notice: starting from the day of the publication, China would implement the managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies, and to strengthen the pricing capability of the financial institutions, which indicates that China officially initiated the reform of the elastic RMB exchange rate system by reverting to managed floating manners.
The authorities announced that the RMB exchange rate would appreciate by 2% and the key point for this exchange rate reform consisted in regression to the managed floating regime and in practical operations, the reform is based on market supply and demand with reference to a basket of currencies at one time.
1. The managed floating exchange rate regime is the comparatively marketized exchange rate system
At present, IMF categorizes the global Exchange Rate Arrangements into eight kinds according to the degree of the marketlization in the sequence from the lower level to the higher level, respectively, Exchange arrangements with no separate legal tender and currency board arrangements；Conventional fixed pegs (including pegging to a single currency and pegging to a basket of currencies), Pegged exchange rates within horizontal bands, Crawling Pegged Exchange Rate System, crawling band, Managed floating and Independent floating. On this menu, the managed floating system ranks only next to Independent (Full) floating system or in a position of higher marketability. The reason is simple because from the point of view of the operative features, the managed floating exchange rate system represents a elastic system permitting of tremendous changes. So since China regressed back to the managed and floating exchange rate system, it has blazed a wider path for the reform of further development in this respect.
2. A viewpoint of promoting the reform: weakening the impulsive force of the risk capital
It is emphasized that the regression to the managed floating system by putting “a basket of currencies” into the position of reference, thus rendering it possible for the monetary authorities to shift from the passive position (maintaining the “pegging” commitment) to the initiative position (not undertaking any par exchange rate). This change of positions plays a significant role in promoting the smooth reform of the exchange rate regime. As a matter of fact, in the whole process of the RMB exchange rate reform, it always remains a vital problem as to how to weaken the impact of the risk capital. Strategically speaking, whether to weaken the impact of the risk capital not only determines the opportunity of initializing the reform but also determines the success or failure of the exchange rate reform. The implementation of the managed floating exchange rate system signals clearly that RMB exchange rate, systematically speaking, shall not maintain the relationship to be pegged to a certain single currency or pegged to a basket of currencies, thus rendering it rather difficult for risk capital to get the definite information of the change of RMB exchange rate and considerably weakening the impulsive force against the RMB exchange rate system and ultimately facilitating the stability of the RMB exchange rate. In essence, the abandonment of any form of “pegging” (including pegging to a basket of currencies) steer the monetary authorities into a favorable position by changing its role in the game with the risk capital.