The Exchange Rate System Reform in China: US Pressure, Implicit Gradual Appreciation and Explicit Exchange Rate Bands

Paul S. L. Yip, Yiu-Kuen Tse and Yingjie Dong
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Paul S. L. Yip: Department of Economics, Nanyang Technological University, Singapore
Yiu-Kuen Tse: School of Economics, Singapore Management University, Singapore
Yingjie Dong: Business School, University of International Business and Economics, Beijing

No 1710, Economic Growth Centre Working Paper Series from Nanyang Technological University, School of Social Sciences, Economic Growth Centre

Abstract: This paper provides a review and empirical investigation of the exchange rate system reform in China over the period between July 2005 and January 2017. We describe the People's Bank of China's (PBoC's) initial achievements and subsequent mistakes in the reform. We note that the central bank's initial honoring of its implicit indication of gradual appreciation played a significant role in its success in the reform initially. However, because of the US pressure for faster renminbi (RMB) appreciation, the PBoC's subsequent violation of the implicit indication of gradual appreci- ation triggered substantial speculative in ows and hence excessive RMB appreciation and volatility between March 2006 and July 2008. We find that during the first ten years of the reform, the PBoC was actually monitoring the RMB-USD exchange rate instead of the nominal elective exchange rate (NEER). This policy failure was one of the reasons for the substantial drop in China's foreign reserves amid the strengthening of the USD between 2014 and early 2017. The PBoC's mini deval- uation on 11 August 2015 was another mistake that had thereafter triggered sharp depreciation and high volatility of the RMB. On the other hand, the several incidences of widening of the RMB-USD exchange rate band over the sampling period was found to have only relatively mild e ect on the volatility of the RMB.

Keywords: fixed exchange rate system; GARCH model; nominal e ective exchange rate; renminbi (search for similar items in EconPapers)
JEL-codes: F15 F31 F33 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2017-08
New Economics Papers: this item is included in nep-cna, nep-sea and nep-tra
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