Eichengreen - China Exchange Rate Regime

Eichengreen - China Exchange Rate Regime - Chinas Exchange...

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1 1 Barry Eichengreen University of California Berkeley March 23, 2006 1. Introduction China&s exchange rate system is a work in progress. The accelerating pace of change makes efforts to analyze it like attempting to hit a moving target. In July 2005, following more than a year of intense discussion, the government announced that it was revaluing the renminbi by 2.1 per cent, switching from the dollar peg to a basket, and allowing the currency to float more freely. 2 In August it expanded the forward market by allowing all banks, including foreign banks, with licenses to trade in the interbank foreign exchange market to transact renminbi forward and swap contracts with clients as well as in the interbank market, and it allowed the banks to determine forward rates independently. The People&s Bank of China also provided additional information on the composition of the reference basket, specifying that it includes not just the dollar, the euro and the yen and the Korean won but also the Malaysian ringget, the Russian ruble, the Australian dollar, the Thai baht, the Canadian dollar and the British pound. The governor of the People&s Bank did not however reveal the weights on the constituent currencies. 1 Revision of a paper for Columbia University&s conference on Chinese money and finance held in New York on February 2-3, 2006. 2 The PBOC announced that it was keeping the existing fluctuation band that limits daily changes in the exchange rate to 0.3 per cent while allowing the operating range and thus the frequency and extent of repositioning of that band to depend more heavily on market conditions. The last part of this statement was initially interpreted this as a commitment to permit an increase in flexibility, although in the week between the announcement and submission of this draft quite a few commentators expressed second thoughts about its meaning.
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2 In September the authorities eliminated an inconsistency between its rules for fluctuations against the dollar and fluctuations against the basket. Under the new regime instituted in July daily fluctuations against the dollar were supposed to be limited to 0.3 per cent per day, while at the same time daily fluctuations against the basket were supposed to be limited to 1.5 per cent. The problem was that if the dollar moved against other currencies by 2 per cent in a day, a not unprecedented event, it might prove impossible to respect both rules at the same time. On September 23 rd the People&s Bank of China therefore announced that henceforth the renminbi would be allowed to fluctuate by 3 per cent a day against the euro, yen and other non-dollar currencies, essentially relaxing this constraint. On November 25
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Eichengreen - China Exchange Rate Regime - Chinas Exchange...

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