The Current Situation And Countermeasures Of Direct Intervention Of China

In 1973,due to the outbreak of the dollar crisis,the Bretton Woods system collapsed,the major developed countries began to implement managed floating exchange rates,and frequently intervene actively in the foreign exchange market.In 2004,they began to implement independent floating exchange rates.In other words,it took about 30 years for the major developed countries to move from managed floating to independent floating.Among them,the joint intervention of the G5 or G7 led by the United States was the most typical,The Plaza Accord in 1985 and the Louvre Accord in 1987 illustrated the necessity of intervention in the foreign exchange market.However,the direct intervention of China,that is,the foreign exchange market operation,was not the traditional direct intervention.In the traditional sense,the direct intervention referred to the behavior that the management directly entered the foreign exchange market to buy and sell foreign exchange,so as to change the exchange rate level.But there was a position management system of foreign exchange settlement and sale in China,the position of foreign exchange settlement and sale of commercial banks was subject to interval management,the surplus foreign exchange position of commercial banks should be sold in the inter-bank foreign exchange market;when the foreign exchange position was insufficient,they should buy from the inter-bank foreign exchange market.However,the position management system of foreign exchange settlement and sale made it difficult for the foreign exchange market to adjust supply and demand spontaneously by itself.Therefore,in practice,when commercial banks squared positions in the inter-bank foreign exchange market,the counter-party of the transaction was usually the people's Bank of China,which made the foreign exchange market operation tended to fall into a passive position.Therefore,in addition to the foreign exchange market operation,there was another important means to manage the level of RMB exchange rates in our country,namely,direct exchange rates regulation,directly,artificially and actively regulated RMB exchange rates by using the complex formation mechanism of central parity.At present,the daily fluctuation of RMB exchange rates was±2%.In extreme cases,yesterday's rise of 2%can be completely offset by today's reduction of the middle price.Therefore,it was necessary to redefine the direct intervention.The definition of direct intervention was extended to the behavior of monetary authorities directly changing the exchange rates level,including direct trading in the market,or directly regulating the exchange rates price.Therefore,the direct intervention of china can be further divided into passive quantitative measures-the foreign exchange market operation and active price measures-direct exchange rates regulation.The separation of volume and price,which complemented each other,constituted a unique foreign exchange intervention system of China.However,there were many disadvantages in the foreign exchange intervention system of China.For example,"811 exchange rates reform" was a special direct exchange rates regulation,in the name of reforming the formation mechanism of the central parity,the People's Bank of China depreciated the exchange rates,which resulted in a one-time depreciation of 2%of the RMB against the US dollar,resulting in the expected depreciation of the RMB exchange rates,resulting in a decline in the proportion of the RMB in global transactions,affecting the process of internationalization of the RMB,and triggering cross-border capital outflows.After that,a series of capital control measures were introduced,which hindered the process of capital account liberalization.Secondly,daily direct exchange rates regulation was prone to trade frictions,in August 2019,China was listed as an exchange rates manipulator by the United States.Thirdly,the foreign exchange market operation and the general position management of foreign exchange settlement and sale caused a series of problems,such as hindering the independence of monetary policy,generating huge explicit financial costs,diminishing marginal sterilization effect and serious currency mismatch on credit.In addition,according to the theory of Portfolio Balance Model,there was interest rates effect in the sterilized intervention,which strengthened the fluctuation of interest rates and was actually kind of hidden management cost.Therefore,based on the theory of Portfolio Balance Model,using the econometric methods such as Johanson cointegration test,Granger causality test and impulse response function,this paper made a comprehensive empirical study on the interest rates effect of the foreign exchange market operation of China.In conclusion,it was necessary to reform the existing foreign exchange intervention system of China.With reference to the direct intervention of Japanese authorities in the foreign exchange market,China should implement exchange rates target zone,and directly intervene in the foreign exchange market based on the exchange rates target zone,while abolishing the current central parity and the limit of 2%rise and fall per day.Therefore,China will manage the exchange rates level of RMB through the direct intervention of the integration of volume and price,that is,the traditional direct intervention,transforming the passive intervention into the active intervention,so as to reduce the frequency of foreign exchange intervention,and only intervene when necessary.The core issue of exchange rates target zone was how to determine the central exchange rates.In this paper,we chose the Balassa-Samuelson effect(the ratio of labor productivity between China and the United States),terms of trade(export price index/import price index),trade openness(total import and export/GDP)and foreign exchange assets(foreign exchange reserves/GDP)and used Johanson cointegration test,VEC model to estimate the RMB central exchange rates model.Secondly,this paper reformed the fluctuation range of the traditional exchange rates target zone,from a single threshold to an interval.According to the error between the central exchange rates calculation results and the average exchange rates,this paper determined that the fluctuation range of the exchange rates target zone of RMB was±3%?5%.Among them,±3%was the early warning line,when the exchange rates fluctuations touched,the management should intervene indirectly first;±5%was the boundary line,the management must intervene directly,intervention should be sufficient and implementation should be decisive.Management can also adopt unconventional means such as window guidance.In addition,from the perspective of economic growth mode,foreign exchange reserves adequacy and financial stability,the conditions for implementing exchange rates target zone in China were basically met.Finally,three supporting measures were needed to implement the exchange rates target zone of RMB.Firstly,we should further relax the control over the general positions of banks in settlement and sale of foreign exchange,and avoid passive foreign exchange withdrawal and release.Secondly,some of the excessive foreign exchange reserves can be used to establish a foreign exchange stabilization funds.Thirdly,the surplus foreign exchange reserves were converted into gold reserves.