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Moving towards market-oriented reforms of RMB exchange rate system

Editor: Li Kun 丨CCTV.com

08-26-2015 16:38 BJT

By Zhang Monan, associate researcher, China Center for International Economic Exchanges

The People's Bank of China (PBOC) announced an adjustment of its RMB central parity system recently. Daily central parity quotes should be based on the previous day's closing rate of the inter-bank foreign exchange rate market, supply and demand, and price movements of major currencies.

Accordingly, the spot exchange rate of the offshore RMB against the US dollar has dropped by 1.87 percent, suffering its biggest one-day decline since the two-track exchange rate was set in 1994, which triggered a global market chain reaction.

However, the exchange rate drop should not be considered currency depreciation. The RMB exchange rate formation mechanism is a crucial factor that hampered China’s Capital Account Liberalization, the RMB internationalization and monetary policy autonomy.

Previously, due to non-market-oriented pricing of RMB central parity and appreciation & depreciation range limits of currency rate, the exchange rate changes can not reflect the real market of supply and demand. The policy of pegging the RMB to the US dollar often places the PBOC under a predicament.

The rate of the RMB against the US dollar or other currencies stands at reactive revaluation, which is intolerable for the Chinese economy for a long time.

Therefore, eliminating restraints of reactive revaluation, improving the RMB exchange rate formation mechanism, and strengthening RMB exchange rate flexibility has become more imperative.
The RMB exchange rate reform started on July 21, 2005. Since then the RMB has appreciated by 29.3% against the US dollar, 47.98% against the Euro, and 49.26% against the Japanese Yen as of August 15, 2015.

The real effective exchange rate and nominal effective exchange rate index rose by 4.57% and 4.88% respectively, setting historical records. Of 61 currencies supervised by the Bank for International Settlements (BIS), the increase of the RMB nominal and real effective exchange rate ranks top 1 and 2.

Therefore, the adjustment to RMB central parity implies an important step in forming the market-oriented mechanism of RMB exchange rate.

RMB central parity system reform is weakening the function of pegging the RMB to the US dollar and could decouple the RMB from the US dollar as well. It will certainly amplify RMB exchange rate fluctuations, but still different from sustainable currency devaluation.

The new reform policy could reduce administrative intervention on exchange rates and increase exchange rates flexibility in order to eliminate the "TWO-tier system" (The TWO-tier system refers to a system of trading rules and exchange price in which the "offshore market" in Hong Kong and other overseas countries differs from the "onshore market" in mainland China). It will promote RMB's more immediate response to the market under strict supervision.

The PBOC may take further steps to expand more access for QFII (Qualified Foreign Institutional Investors)in the onshore foreign exchange rate market, strengthen links between "onshore market" and "offshore market" and promoting the same RMB exchange rate in domestic and international markets.

The reform will help to eliminate policy distortions of RMB central parity, and push central parity for the exchange rate of RMB against the US dollar at a closer market equilibrium price.

Adopting the policy of one-time giant devaluation instead of sustainable depreciation also indicates that the PBOC is making short-term and proactive initiatives after enduring a reactive movement in the long term. This stands for the short-term adjustment for excessive appreciation of RMB and makes the currency return to a reasonable value.

The development towards a market-oriented exchange rate formation system is a precondition for the RMB to be included in the "Special Drawing Rights" (SDR) conducted by the International Monetary Fund (IMF).

In the annual Article IV Consultation Staff Report for China released by International Money Fund (IMF) shows that the RMB real effective exchange rate has been appreciated in the last year, and the current value of RMB is no longer undervalued.

The direct impact is that RMB devaluation will lead to China’s net capital outflows and an increasing risk of external debt.

Data from Chinese financial institutions show that funds outstanding for foreign exchange declined by 249.1 billion yuan, while data counted by PBOC fell by 308 billion yuan. Both numbers have reached the largest outflow per month in their history. Meanwhile, the rapid devaluation of RMB is increasing China’s overseas debts. 

At the end of 2014, Chinese foreign debt stood at around 4.63 trillion US dollars. The foreign debt has increased by more than 230 billion dollars in several days in terms of currency depreciation.

The RMB exchange rate remains sustainable for a long-term with bi-directional volatility in short-term to maintain the financial asset prices, prevent massive capital outflows, control foreign debt risks, reduce financing costs and debt burdens, as well as maintain economic expected growth rates.

All adaptations are in line with the current national strategic interests and requirements of internationalization of the RMB.


( The opinions expressed here do not necessarily reflect the opinions of Panview or CCTV.com. )



Panview offers a new window of understanding the world as well as China through the views, opinions, and analysis of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.

Panview offers an alternative angle on China and the rest of the world through the analyses and opinions of experts. We also welcome outside submissions, so feel free to send in your own editorials to "globalopinion@vip.cntv.cn" for consideration.


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