Foreign Exchange Rate Reform

China must expand opening up and develop foreign trade and economic cooperation to make the Chinese and international economies complementary and speed up the modernization drive. The most basic needs are to intensify restructuring of the foreign trade system, set up rules and regulations in line with the

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.

Value-added Tax and Leverage:Evidence from China's Value-added Tax Rate Reform

This paper uses China's value-added tax(VAT)rate reform as a quasi-natural experiment to identify the impacts of VAT rate shocks on corporate financial leverage.The results indicate that the reform reduced corporate total leverage significantly.There was a decrease in short-term leverage,but long-term leverage showed no significant change.These results remained robust across a series of robustness checks.Mechanism analysis shows that increasing profitability and improving cash flows acted as intermediary channels for the reform's impact on leverage.The reform also contributed to the mitigation of the asset–liability mismatch problem and the reduction of debt risk,while having no apparent impact on corporate investments.Finally,enterprises with more elastic demand and those with lower intermediate input ratios were affected most by the deleveraging effect of the VAT rate reform.This study suggests how the VAT rate cut shaped corporate capital structure.It thus helps to explain the economic consequences of VAT rate shocks.

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.

Chinese Yuan after Chinese Exchange Rate System Reform

In this paper, the actual exchange rate policy conducted by the Chinese government after the Chinese exchange rate system reform on 21 July 2005 is investigated. Also, the long-run effect is investigated, including the Balassa-Samuelson effect on the Chinese yuan. It was found that the Chinese government generated a statistically significant but small change in exchange rate policy during the sample period until 25 January 2006. It was not identified that the Chinese monetary authority is adopting the currency basket system because the change is too small in the economic sense. It is indicated that the Chinese government should take account of the productivity growth of countries composing the currency basket in order to operate a currency basket regime.

RMB exchange rate reforms and exchange rate preferences of domestic interest groups in China

With balance of payments in China and the RMB exchange rate approaching the equilibrium level,political gaming of domestic interest groups rather than international political pressures plays a more important role in future bidirectional changes of the RMB exchange rate.From the perspective of political economics,this paper analyses the dynamics of exchange rate preferences of domestic interest groups and their role in the evolution of RMB exchange rate regimes.The findings show that interest groups and their exchange rate preferences do play a significant role in RMB exchange rate reforms,which implicates that it is necessary to take account of policy preferences and political gaming of interest groups in the determination and forecasts of the RMB exchange rate.

Weights and Empirical Analysis of RMB Exchange Rate Adjustments with Reference to a Basket of Currencies Following the Exchange Rate System Reform of 2010

This paper constructs an RMB/USD exchange rate index and a basket currency exchange rate index. The correlation maximization of the RMB/USD and the basket currency index may determine the weight and quantity of the basket currency. The currency basket indicates that the weight of the USD is highest, whereas that of the GB Pound is the lowest. Our currency basket has a high linear dependence on that of the central bank. We found that the RMB/USD and currency basket indices have a long-term co-integration relationship according to the optimal currency weights. The results of the error-correcting model manifest as the RMB/USD exchange rate deviates from the long-term equilibrium level, wherein 76.3% will be corrected. This paper checks the prediction capacity, which indicates the good fit of the model. By using the Granger causality test the findings show that the People＇s Bank of China adjusts the RMB/USD exchange rate with reference to the currency basket.

People's Bank of China Unveils Interest Rate Policy Reform

China’s central bank has unveiled its market-oriented proposals on interest rate policies. The People’s Bank of China said that China’s interest rate market reform would give priority to foreign currencies, rather than the Chinese currency. That means the day when the fluctuation of interest rates of foreign currencies will be liberalized would come before the floating of the Renmenbi rate.

New Chapter in Exchange Rate Reform

Introduction of new trading model has multiple significance China's central bank invited public bidding among 10 major domestic commercial banks to carry out one-year-long currency swap transactions last November. This move, according to Zuo Xiaolei, Chief Economist of China Galaxy Securities Co. Ltd., not only enables financial derivatives to become an operational instrument for implementing monetary policy, but also represents another action of the marketization of the exchange rate regime after an ear...

Putting the Cart before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China

This paper reviews the issues involved in moving towards greater exchange rate flexibilityand capital account liberalization in China. A more flexible exchange rate regime wouldallow China to operate a more independent monetary policy, providing a useful bufferagainst domestic and external shocks. At the same time, weaknesses in China’s financialsystem suggest that capital account liberalization poses significant risks and should be alower priority in the short term. This paper concludes that greater exchange rate flexibilityis in China’s own interest and that, along with a more stable and robust financial system, itshould be regarded as a prerequisite for undertaking a substantial liberalization of thecapital account.

Structural Changes in the Renminbi Exchange Rate Mechanism

This paper examines structural changes in China s exchange rate mechanism.For this purpose,we propose a predictive model incorporating three factors that influence the central parity rate:a smoothing factor,a market factor,and a basket factor.We first apply the model to analyze the effects of 12 exchange rate reforms since 2005,treating these reforms as predetermined structural breaks.Among other results,we find that the main impact of introducing a“counter-cyclical factor”is to weaken the role of the basket factor.We estimate structural breaks in data,assuming that the number and dates of breaks are unknown,and we find that,although the majority of estimated breaks occur within the neighborhood of exchange rate reforms,there are breaks due to other external shocks such as the escalation of the China-US trade conflict in May 2019.It is suggested that our model may be used to guide future currency reforms in China.

Spillover Effect in the RMB Foreign Exchange Market:Based on VAR and DCC-MVGARCH Models

This paper analyzes the stability and marketization of the RMB exchange rate after China introduced the foreign exchange rate reform by linking the RMB exchange rate with the offshore and onshore markets on August 11,2015(“8/11”).Under the framework of dynamic analysis,through Granger causality test,VAR model and DCC-MVGARCH model,the empirical analysis is conducted about the three market exchange rate linkages of CNY,NDF and CNH from May 2012 to December 2018.Then,the direction and degree of the linkage between the RMB’s offshore and onshore exchange rates before and after the“8/11”exchange rate reform are compared.The research results show that:(1)since the“8/11”exchange rate reform,the RMB exchange rate has become more flexible;(2)the price-determining power of the RMB exchange rate may be weakened,and policy adjustment should take effect;and(3)the prerequisites,under which the offshore market can play a role,are the development of the market itself.This paper proposes that:(1)the onshore and offshore markets should develop in a collaborative manner to further increase exchange rate elasticity and flexibility;(2)close attention should be paid to the relationship between the offshore and onshore markets,and policy determination and flexibility should be maintained;and(3)the offshore market should be improved and play a due role.