China largely succeeds in RMB exchange rate reform over past year
On Aug. 11, 2015, the People's Bank of China (PBOC), the central bank, announced a major improvement to the formation of the RMB's central parity rate against the U.S. dollar, by taking into consideration the closing rate on the inter-bank forex market of the previous day.
The move was described by the PBOC as a "one-time correction" to bridge previously accumulated differences between the central parity rate and the spot market rate, which would make the central parity rate more consistent with the needs of market development.
The central parity rate is the starting point for daily forex trading, and the RMB is allowed to rise or fall by 2 percent from the central parity rate each trading day from March 2014.
Think tank and the International Monetary Fund (IMF) experts agreed that the central bank's move was very much in the direction to increase the role of market forces in the determination of the RMB exchange rate.
But some market participants at that time misinterpreted it as an effort to prop up the economic growth by currency devaluation and incorrectly jumped to the conclusion that China's economy was probably worse than stated. The RMB fell sharply in value in the following days after the reform of the central parity system.
"I think initially when they started changing the system a year ago, they were not good at communication, and there was a lot of confusion in the market about what their intention was," David Dollar, a senior fellow with the Brookings Institution and former official of the World Bank and the U.S. Treasury Department, told Xinhua.
However, Chinese authorities provided "pretty good and clear communication" about its exchange rate policy over the next few weeks and months, Dollar said, citing authorities' arguments that they wanted to have more market forces involved and there was no need for large depreciation of the currency.
Chinese officials have also repeatedly said that China has no intention of devaluating the RMB to gain an advantage in global trade. China has successfully moved up the value chain into higher value-added products and its share of global exports continued to expand in recent years despite the significant appreciation of the RMB, according to Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics and a leading expert on China's economy.
China's current account surplus was about 300 billion dollars last year, which was the largest in the world in absolute terms, indicating that China didn't need to devalue its currency to boost the economic growth, Lardy said.
"China has a large trade surplus, and it's a rapid growing economy, there' s not really the basis for depreciation," echoed Dollar.
But capital outflows from China increased significantly in September and December as market participants expected that the U.S. Federal Reserve would start raising interest rates by the end of the year and the dollar would rise more rapidly against other currencies.
On December 11, China introduced a RMB exchange rate composite index to help guide market participants to shift their focus from the bilateral RMB/USD exchange rate to the effective exchange rate based on a basket of currencies.
The new index, released by China Foreign Exchange Trade System (CFETS), is calculated by comparing RMB to the average value of the 13 foreign currencies, including the U.S. dollar, euro and Japanese yen, weighted according to the trade volume with China.
The PBOC noted that valuing against a basket of currencies does not mean a peg to the basket, but it "will contribute to maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level."
The PBOC also took several other steps, including selling forex reserves, implementing macro prudential regulations and strengthening checks on capital outflows, to help stabilize market expectations for the RMB exchange rate, according to Guan Tao, a sen
Read more at Xinhua