Acknowledgements
I would like to take this chance to express my sincere gratitude to my advisor Liu Wei in the Foreign Languages Department for his/her kindly assistance and valuable suggestions during the process of my thesis writing. Her willingness to give his/her time so generously has been very much appreciated.
My gratitude also extends to all the teachers who taught me during my undergraduate years for their kind encouragement and patient instructions.
Abstracts
This paper mainly resorted to the economics views, such as the exchange rate system choice theory. Firstly, on the basis of recalling the whole progress of the RMB exchange rate regime, this paper analyzed the RMB peg deeply, clarifying the international and internal reasons that cause this to happen as well as analyzing the conditioning effect of this system on the macroeconomic policies by means of theory and positive analysis, and thus this system needs reforming; Secondly, this paper explained the RMB exchange rate system formation mechanism in detail, and commented that it’s the proper time and mouthed for RMB to execute the exit strategy; Next, this paper also provided overall analysis of the effects that may affect the economy when the RMB exchange rate system reformation and slight RMB appreciation are applied on macro-and microcosmic aspects; Lastly, this paper pointed out the problems existing in today’s RMB exchange rate system formation mechanism, which are mainly the distortion of the exchange rate system formation mechanism, the lack of flexibility of the exchange rate and the high expense to maintain this system, besides, it also offered some measures to improve the information direction and core contents of the RMB exchange rate formation mechanism.
Key words: RMB Exchange Rate; Formation Mechanism; Reform
摘 要
本文主要借鉴了汇率制度选择理论等经济学的相关观点，首先，在全面回顾人民币汇率制度的演变过程的基础上，对人民币长期钉住美元的汇率机制进行深入分析，阐明钉住美元制形成的国际背景及内在原因，并通过理论和实证分析论证了这种制度对宏观经济政策产生了较大的制约作用，因此需要对这一制度进行改革；其次，文章详细介绍了人民币汇率形成机制，并从退出战略的角度对此次改革进行评析，认为人民币汇率此次退出的时机和方式都比较恰当；接着，该部分还从宏观和微观层面全面分析了汇率改革及人民币小幅升值对经济的影响；最后，文章剖析了现行人民币汇率形成机制所存在的问题，突出表现在汇率形成机制扭曲、汇率变化不够灵活、维持成本高等方面，并结合我国实际进一步探讨完善人民币汇率形成机制的改革走向、核心内容及相关措施。
关键词：人民币汇率；形成机制；改革
Acknowledgements i
English Abstract and Keywords ii
Chinese Abstract and Keywords iii
Table of Contents iv
1. Introduction 1
2. the formation mechanism of exchange rate of the general principle 2
2.1 Definition of the concept 2
2.2 Influence the formation mechanism of exchange rate of main factos 3
2.3 Our country of the yuan's exchange rate mechanism operation status …………………………………………………………………………………..3
3. Our country the RMB exchange rate mechanism of the analysis of the existing problems 4
3.1 Foreign exchange market is not perfect 4
3.2 The current exchange rate mechanism in the capital controls will highlight the new release of drawbacks 5
4. China's current exchange rate system analysis of the causes of the existing problems………….. 5
4.1 China's current exchange rate system in the current situation has an inherent ins……….......................................................................................................................5
4.2 China's current exchange rate system on microscopic deficiencies……….…5
4.3 China's current exchange rate system on macroscopic deficiencies …….…..5
5. To our country the RMB exchange rate mechanism adjustment suggestion 6
5.1 The reform of the RMB exchange rate mechanism direction 6
5.2 Improve the core content of the exchange rate mechanism ………………....7
5.3 Our country the RMB exchange rate mechanism adjustment measures……..7
6. Conclusion 8
Works Cited 8
1. Introduction
Exchange rate formation mechanism is the relationship between the supply and demand of foreign currency and the relationship among some other factors that affect and restrict each other and the process of the formation of equilibrium price. In fact, the exchange rate formation mechanism is a country’s choice to determine its exchange rate regime. The frequent financial crisis in those emerging countries have proved that, nowadays, the choice and change of a country’s exchange rate regime is of great importance not only for its own economy growth but also for other countries, because today the international finance is highly integrated and once a financial crisis occur, it can be transmitted to other countries by means of exchange rate regime. Therefore, to choose a proper exchange rate regime and exchange rate policy becomes an important issue of the macroeconomic management under opening condition, and it is also becomes a worldwide issue.
2. General principles of the exchange rate formation mechanism
2.1 Definition of the concept
On the basis of summarizing all kinds of literatures and documents, this paper defined the exchange rate formation mechanism as “the process of the formation of the equilibrium price due to the interaction among the supply and demand of foreign currency and other factors under the specific exchange rate regime,” in brief, the exchange rate formation mechanism is the formation and adjustment process of the exchange rate under specific exchange rate regime. As to the formation of the regime, there are just two ways: one is through the government, that is, the exchange rate is set up and adjusted by the government; the other is through the market, that is, the exchange rate is set up and adjusted by the supply and demand relation in the foreign exchange market.
2.2 Main factors affecting the exchange rate regime
The variation of one country’s exchange rate can be influenced by numerous factors, including economic factors, political factors and psychological factors. Judging from the practice after the fall of the Breton Woods System, we can see that the exchange rate has a high volatility. Besides, there exists an interdependent relationship of mutual restrict between each factor. Even the same factor can act differently in different countries at different time; therefore, the exchange rate movement is an extremely complicated problem.
2.2.1 The current conditions of RMB exchange rate operation
From January 1st, 1994, our country combined the official exchange rate with the foreign exchange market rate, forming a single and managed floating exchange rate system on the basis of market demand and supply, which changed the formation and operation of RMB exchange rate substantially. This policy changed the method to determine or adjust the exchange rate mainly by administrative measures, and encouraged the market system to adjust the exchange rate; making the demand and supply relation of the foreign exchange market become the foundation to determine the RMB exchange rate.
3. The problems in the operation of the RMB exchange rate
Imperfect foreign exchange market
Well-regulated foreign exchange market usually includes two parts: one is interbank foreign exchange market, which is also called wholesale market; the other is retail market. Interbank foreign exchange market is the place where banks carry out transactions; these transactions are not only large but also capable of forming the market rate of exchange, which lay the foundation of the retail price. The participants involved in the interbank foreign exchange market are commercial banks, some non-bank financial institutes, central bank and some foreign exchange brokers.
3.1 New problems of the current exchange rate formation mechanism will emerge after the relaxation of the capital control
Although our country adopted the managed floating exchange rate system, it is indisputable that the RMB exchange rate has showed some fixed exchange rate features. In Yi Gang’s opinion, for those developing countries that still have strict controls on the capital accounts, their commitment to implement the floating exchange rate system will end up in carrying out the fixed exchange rate system.
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4. The reasons for the problems that relating to the RMB exchange rate regime
4.1 The instability of the RMB exchange rate regime in current situation
In this current global context, the international capital movement is rapid and the investment is of uncertainty. The most important features of the international economy are the development of the economic globalization, and the unavoidable liberalization of the trade, investment and finance. With the development of the modern information technology, the economic virtualization is becoming more obvious day by day, and a great deal of international capital is moving in and out of each financial market rapidly, in order to get the advantage investment opportunities Though these international capitals bring benefits to these markets, at the same time, they can be very destructive and can increase the uncertainty of the market speculation. Among the entire financial crisis in the 1990s, we can see the international speculative capitals. Researchers have proved that all the countries that adopt the floating exchange rate system can successfully avoid the impact of the speculative capitals while the countries that suffered a lot from the financial crisis all implemented the fixed exchange rate system.
4.1.2 The microcosmic deficiencies of the RMB exchange rate regime in current situation
The microcosmic deficiencies of the RMB exchange rate regime in current situation leads to the discordance of the nominal exchange rate and the actual exchange rate. Economic theory holds the view that the nominal exchange rate has a quite big adjustment effect on the capital accounts, however, the adjustment effect on trade balance is not obvious, and the real effective exchange rate is what determines the trade balance. The formation mechanism and amount of variation of the nominal exchange rate and he actual exchange rate are different, therefore, when analyzing the influence of the RMB exchange rate fluctuations on the economy, we should not consider the nominal exchange rate only, instead, we need to bear in mind that the fluctuation trend of the actual exchange rate is more related to improve the competitive power of our country’s products. In other words, the formation mechanism of RMB exchange rate system can be more flexible, and the exchange rate policies should focus on the real effective exchange rate instead of the nominal exchange rate. In practice, due to the difference between the Sino-US economic development and inflation rate, the nominal exchange rate and the actual exchange rate of RMB against US dollar are quite different, which is not propitious for improve the comprehensive competitive power of our country’s products, and make RMB the target of attacks?
4.2The macrocosmic deficiencies of the RMB exchange rate regime in current situation
Exchange rate lost the ability to act as the economic lever. According to Pareto Optimality Theory, economic system should pursue the optimization of the resource allocation. When the market economy reaches the optimization situation, it means that the resource has been used most effectively. As the price of the foreign exchange funds, the exchange rate is one of the means to carry out the macroeconomic control, the important method to implement the resource allocation, a clearing function in China’s exchange rate and acts as a foreign trade policy. The theory “exchange rate depends on the foreign trades, and foreign trades depend the profit,” is not propitious for the stability of the macro economy, for it is, in fact, sacrificing the inner balance to satisfy the outside balance.
5. Suggestions on the adjustment of RMB exchange rate formation mechanism
5.1 Reform direction of RMB exchange rate formation mechanism
It is should be combined with Chinese realities when planning to improve RMB exchange rate formation mechanism. We should combine the exchange rate reform with the independence of Chinese monetary policies, international balances and international monetary cooperation as well as refer to the experience of other countries. Only by reforming and improving the current exchange rate can Chinese economy be able to avoid risks to the greatest extent during the further opening up progress and to boost the economic development.
5.2 Core contents of RMB exchange rate formation mechanism to be perfected
5.2.1 To perfect the decision foundation of the exchange rate
To summarize all the theories on exchange rate determination, we can draw the conclusion: the monetary assets market mechanism and prospects mainly determine the short-term rate; the mid-term rate is often determined by the current accounts of the international balance of payment; the long-term rate is finally determined by currency and the real economy. With the gradual relaxation of the capital project control and the gradual mercerization of RMB, the demand and supply relation of the foreign exchange market will mainly be seen at the aspect apart from the demand and supply relation of the foreign exchange revenue and spending of current accounts, based on which the decision foundation of RMB will certainly mainly turn to the current accounts as well as other factors, especially the capital movement. [44]
5.2.2 To improve the fluctuation and elasticity of the exchange rate
With the deep degree of China’s opening up after entering in WTO, the factors that affect and determine the exchange rate movement become more complicated. Under this circumstance, the fluctuation range of the RMB exchange rate should be extended properly, the central bank should reduce its intervention frequency in the market, and the exchange rate level should be adjusted by other economic means and methods, thus to improve the flexibility of RMB exchange rate. By doing so, on one hand, the signal role of the exchange rate can be strengthened, proper resource allocation can be applied, and the market participants can react quite freely according to the signal role of the exchange rate, therefore, the exchange rate can truly reflect the variations of the demand and supply relations in foreign exchange market; on the other hand, market entities’ risk awareness can be roused, investors’ behavior rationality can be improved, and the market foundation for the further opening up of finance can be laid. Besides, reducing the state intervention can help to save intervention cost and improve the executor force of the central bank’s monetary policies.
5.3 Specific measures of RMB exchange rate formation mechanism
5.3.1 To increase the number of market entity
The marketing degree of RMB exchange rate is not high, one of the reasons for this phenomenon is that the number of market entity is small and the market entity groups lack diversity. The reasonable market price can only form on the basis of full competition. Nowadays, only a small number of commercial banks make proprietary trading in the foreign exchange market, forming a limited market size, therefore, it is necessary to change the commercial banks’ unified management of foreign exchange funds, allow their branches to enter the market according to needs, allow some non-bank financial institutes to enter the market and, in order to avoid the market price level be monopolized by the concentrative transactions of those large organizations, more enterprises and financial institutes should be allowed to participate in the foreign exchange trading directly. This is an important link to straighten out the demand and supply relationship of foreign exchange, increase the competitive power of the market entity and complete the foreign exchange market as well as to reduce the intervention frequency towards the foreign exchange market from the central bank.
5.3.2 To promote the reform of exchange settlement of the current account
With the increasing of the market entity, the extent of their involvement should also be deepened. The goal of the reform is to cancel the mandatory exchange settlement, so as to form a voluntary exchange settlement system. The implementation of voluntary exchange settlement can be of great importance, for it can help to perfect the RMB exchange rate formation mechanism, change the passive intervention place of the People’s Bank of China and increase the market proportion that is determined by RMB exchange rate. Therefore, at present, we can adopt proportion exchange settlement as the transitional means to change form the mandatory exchange settlement to the voluntary exchange settlement. To apply the proportion exchange settlement to enterprises means that theses enterprises executes limitation settlement of exchange toward banks proportionally, the left proportion of foreign exchange which remain in enterprises’ cash account is at their own disposal, and the settlement exchange proportion can flexibly adjusted by the central bank according to the changing conditions of the state’s inputs and outputs as well as reserves.
6. Conclusion
The current exchange rate regime is not perfect, and there exist some deficiencies that limit economic development. To solve these existing problems in the current exchange rate regime, some arguments about choosing the RMB exchange rate regime emerged. Should we give up the current exchange rate regime to implement the free floating, peg to Currency Basket or exchange rate target zone or to improve the current exchange rate formation mechanism? Through theory and practice, this paper holds the view that the advantages of the current exchange rate should be reserved and the deficiencies should be removed or reformed. Compared with other reform plans, the implementing risk of this plan is low and can be withstander by the current economic condition. In the long run, the reform of RMB exchange rate regime is a gradual process. With the constant improvement of the reform of foreign exchange system, the expansion of foreign exchange rate fluctuations of the RMB will change to the free floating, and finally to form the fully free conversion, and also the market development degree of the exchange rate formation mechanism will be further improved and the exchange rate will be more reasonable. Such a gradual-forming and opening exchange rate management process can help us achieve the internationalization of the RMB with the minimum risk and the most appropriate measures.
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