Abstract
Since the People’s Bank of China announced the implementation of a managed floating exchange rate regime based on market supply and demand in July 2005, not only the CNY (RMB) to USD exchange rate but also the nominal (real) effective exchange rates started a long process of appreciation. On August 11, 2015, the People’s Bank of China launched a reform of the formation mechanism of the RMB central parity rate against the USD. The CNY (RMB) to USD exchange rate ended its unilateral appreciation trend and entered into the stage of volatile fluctuation. In 2015, the RMB central parity against the USD devalued by about 6 %. In 2016, the devaluation trends of the CNY (RMB) against the USD have not weakened and remain volatile and downward.
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- 1.
Compared to the faster depreciation, the one-time depreciation has greater impacts on the market. The endpoint of depreciation is difficult to determine. The failure experience of the one-time depreciation of the Thai baht during the 1997 Asian financial crisis shows that the so-called “position” in “depreciation to position“is difficult to grasp in practice. Once a currency enters a steep depreciative path, it is likely to arouse excessive nervousness in the market, triggering a self-realizing depreciation expectation “avalanche” and eventually making the exchange rate out of control and bringing great volatility risks to the macro economy. Therefore, the research team believes that a one-time depreciation is not a policy option. Moreover, technically, this trend is difficult to determine, and it cannot be simulated.
- 2.
While the Central Bank can supplement market liquidity using monetary policy tools such as the SLO, SLF, MLF, and PSL (established in 2013) and traditional means such as reducing the reserve rate, the scenario of rapid depreciation, which will only make the situation worse and strengthen the expectation of RMB depreciation, will accelerate currency depreciation.
- 3.
In the 1997 Asian financial crisis, Thailand ended its baht intervention, and the baht depreciated 18 % that day, achieving the expected depreciation (20 %). However, the baht continued to fall 60 %, greatly exceeding the expected depreciation.
- 4.
Although the Central Bank might intend to use this opportunity to increase the RMB fluctuation range, the one-way fluctuation expectation is quite strong. Given the current economic environment, the research group believes that it is not a good time to take this action.
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© 2016 Springer Science+Business Media Singapore
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Center for Macroeconomic Research of Xiamen University. (2016). Policy Simulation. In: China’s Macroeconomic Outlook . Current Chinese Economic Report Series. Springer, Singapore. https://doi.org/10.1007/978-981-10-2068-1_3
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DOI: https://doi.org/10.1007/978-981-10-2068-1_3
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Publisher Name: Springer, Singapore
Print ISBN: 978-981-10-2067-4
Online ISBN: 978-981-10-2068-1
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