Analysis: RMB's exchange rate more flexible since 2005 reform
Wednesday, July 21, 2010 10:05 AM
BEIJING, Jul. 21, 2010 (Xinhua News Agency) -- Today marks the 5th anniversary of China's reform of its RMB exchange rate mechanism. The exchange rate of RMB against the US dollar has appreciated almost 22 percent by July 21 since China officially launched the RMB exchange rate mechanism reform on July 21, 2005, and the RMB exchange rate has become more flexible during the past five years.
Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.
In 2008, when the financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the US dollar depreciated by varying margins. However, the Chinese yuan remained stable. The stability of the RMB exchange rate has played a significant role in mitigating the impact of the financial crisis and promoting global rebalancing.
With the recovery of China?s economy, the People?s Bank of China (OOTC:BACHY) , China? central bank announced on June 19 that it would further reform the yuan exchange rate mechanism to improve its flexibility.
The following chart shows the central parity rate of RMB against the US dollar since July 21, 2005 to July 21 1010:
Noticeably, China has been under great pressure of RMB appreciation during the five years. On one hand, China?s forex reserves remained at high level while trade surplus kept increasing, and on the other hand, there were rising voices outside the country urging China to revalue its currency.
However, China has always pursued RMB exchange rate mechanism reform at its own pace.
A stable RMB has become an important foundation for China to counter the international financial crisis and embrace its economic recovery.
Against the background that RMB is not convertible under capital account, a managed floating exchange rate will help lift the effectiveness of monetary policy, improve China?s macroeconomic control, and rein in inflation and asset bubbles.
International practice has proved that large economies that peg to a single currency are more vulnerable in face of crisis, while a country?s status and influence in the international market require a more adjustable and flexible exchange rate policy.
The RMB exchange rate has become more flexible in recent months after the restart of exchange rate reform on June 19 has allowed bilateral fluctuation.
In the meantime, China?s autonomous and prudent attitude in reforming the RMB exchange rate has won the acceptance and respect of the world community.
Wang Qing, chief analyst with the Morgan Stanley (NYSE:MS) in great China area, holds that further reform of RMB exchange rate mechanism would help rebalance China?s economy, moving the country?s economic growth to a domestic demand-driven rather than a trade driven pattern.
China is now promoting construction of an RMB offshore market based in Hong Kong, which will facilitate RMB internationalization and the development of an RMB asset market. (Edited by Hou Yujie, houyj@xinhua.org)
Wednesday, July 21, 2010 10:05 AM
BEIJING, Jul. 21, 2010 (Xinhua News Agency) -- Today marks the 5th anniversary of China's reform of its RMB exchange rate mechanism. The exchange rate of RMB against the US dollar has appreciated almost 22 percent by July 21 since China officially launched the RMB exchange rate mechanism reform on July 21, 2005, and the RMB exchange rate has become more flexible during the past five years.
Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.
In 2008, when the financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the US dollar depreciated by varying margins. However, the Chinese yuan remained stable. The stability of the RMB exchange rate has played a significant role in mitigating the impact of the financial crisis and promoting global rebalancing.
With the recovery of China?s economy, the People?s Bank of China (OOTC:BACHY) , China? central bank announced on June 19 that it would further reform the yuan exchange rate mechanism to improve its flexibility.
The following chart shows the central parity rate of RMB against the US dollar since July 21, 2005 to July 21 1010:
Noticeably, China has been under great pressure of RMB appreciation during the five years. On one hand, China?s forex reserves remained at high level while trade surplus kept increasing, and on the other hand, there were rising voices outside the country urging China to revalue its currency.
However, China has always pursued RMB exchange rate mechanism reform at its own pace.
A stable RMB has become an important foundation for China to counter the international financial crisis and embrace its economic recovery.
Against the background that RMB is not convertible under capital account, a managed floating exchange rate will help lift the effectiveness of monetary policy, improve China?s macroeconomic control, and rein in inflation and asset bubbles.
International practice has proved that large economies that peg to a single currency are more vulnerable in face of crisis, while a country?s status and influence in the international market require a more adjustable and flexible exchange rate policy.
The RMB exchange rate has become more flexible in recent months after the restart of exchange rate reform on June 19 has allowed bilateral fluctuation.
In the meantime, China?s autonomous and prudent attitude in reforming the RMB exchange rate has won the acceptance and respect of the world community.
Wang Qing, chief analyst with the Morgan Stanley (NYSE:MS) in great China area, holds that further reform of RMB exchange rate mechanism would help rebalance China?s economy, moving the country?s economic growth to a domestic demand-driven rather than a trade driven pattern.
China is now promoting construction of an RMB offshore market based in Hong Kong, which will facilitate RMB internationalization and the development of an RMB asset market. (Edited by Hou Yujie, houyj@xinhua.org)