To Accomplish the Unaccomplished Reform： Lessons and Options of RMB Exchange Rate Reform

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.

Structural Evolution of RMB Exchange Rate Reform: Historical Review, Experience and Prospect

The Renminbi(RMB)exchange rate regime reform has gone through three stages roughly once every decade since 1994.It is a structural evolution through the unification of dual exchange rates,increased fluctuations and central parity rate reform in response to the dynamic macro environment in China and abroad.This paper unpacks leading and supporting reforms for each stage and reviews the effects.The reform has developed historical experience in adopting progressive strategies,avoiding sharp exchange rate fluctuations in the near term,maintaining appropriate capital controls,and guaranteeing the reform through domestic structural reforms.Achieving a free-floating exchange rate will be the ultimate goal,but it will not be made easily in the short run.During the transitional period,it is recommended that an annual target zone for RMB's effective exchange rate be arranged for the CFETS currency basket,along with necessary capital controls.

RMB Exchange Rate Regime: Suggestions on Further Reform and Exit Strategy

Since 2000, the focus of the study of the RMB ex change rate has transferred from debate on whether it should appreciate or depreciate to the overall planning and the envisaged improvement of the RMB exchange rate regime.

Trilemma,RMB exchange rate regime reform,and policy orientation after August 2015

The discussions on RMB exchange rate could not depart from the ongoing reform of RMB exchange rate regime,which must be designed and promoted as an integral part of the large open economy macroeconomic policy framework.As a large open economy facing the trilemma,China should explicitly establish the principle of domestic monetary policy dominance in the impossible trinity,with the exchange rate policy and capital account management should both conform to this fundamental principle.Simplistically pegging RMB to the US dollar will result in lack of flexibility and violate this principle.Especially against the backdrop of unsynchronized economic cycles of major economies and the prospect of further Fed tighten up,that the real effective exchange rate of RMB moves passively along with the US dollar cannot reflect the relative changes in economic fundamentals in China and abroad,which will cause distortions,resulting in resource misallocations and loss of welfare.The reform of RMB exchange rate regime should be market-oriented,towards a direction with more flexibility.