![]() ![]() At the end of July 21, the market anticipated further renminbi appreciation, as the two-month NDF renminbi-dollar exchange rates stood below 8 renminbi per dollar. Although these forward contracts constitute a relatively thin market, they can be considered the best indicator available of the market’s beliefs about the future path of the renminbi-dollar exchange rate. The following day, the renminbi exchange rate will be allowed to fluctuate against the dollar within a band of plus or minus 0.3% around the announced central parity.įigure 1 shows the market reaction to the announcement by graphing the daily closing values of the renminbi-dollar exchange rate and the two-month renminbi non-deliverable forward (NDF) rates around the time of the revaluation. I find that movements in China’s trade-weighted exchange rate indexes over the long term are relatively insensitive to currency composition moreover, when viewed over the previous four to five years, all three indexes exhibit appreciation against the dollar far exceeding the initial 2.1% renminbi revaluation.Īccording to the July 21 announcement, each day the PBOC will announce its target for the following working day based on that day’s renminbi closing price in terms of a “central parity.” For example, the target may be expressed in terms of the value of the renminbi against the dollar. Because the PBOC provided only guidelines, and not specifics, about the composition and trade weights of the reference basket, I construct three likely indexes and compare their movements with each other and with the bilateral renminbi-U.S. I also examine how the renminbi might have moved in the past if this regime had been in place. In this Economic Letter, I review several characteristics of the new renminbi regime. The announcement stated that the changes were made “ith a view to establish and improve the socialist market economic system in China, enable the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange rate regime based on market supply and demand.” However, the announcement and subsequent clarifications leave the PBOC with considerable discretion over its renminbi target. Under the reform, the PBOC will incorporate a “reference basket” of currencies when choosing its target for the renminbi. The revaluation puts the renminbi at 8.11 against the dollar, which amounts to an appreciation of 2.1%. dollar at an exchange rate of 8.28, the People’s Bank of China (PBOC 2005a) announced a revaluation of the currency and a reform of the exchange rate regime. On July 21, 2005, after more than a decade of strictly pegging the renminbi to the U.S. It is prepared under the auspices of the Center for Pacific Basin Studies within the FRBSF’s Economic Research Department. This series appears on an occasional basis. Movements in trade-weighted reference indexes since 2001.Trade-weighted renminbi reference indexes.A Look at China’s New Exchange Rate Regime ![]()
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