Chinese Exchange-Rate Regime Choice In Opening-up Course

Both Latin American debt crisis, currency crisis in 1980s,and Asian financial turbulence in 1990s which took off in Thailand have shown that inappropriate exchange rate regime is an important causal factor for crisis. After these crises, many economists and central banks began to reconsider the choice of exchange rate regime, As for China, in further financial opening-up, there exist the following questions:1 .What exchange-rate regime is the present one in fact, which is somehow described as, "Managed floating regime"? What are its major disadvantages in practice? Is it necessary to alter this regime?2. If change is necessary, in the milieu of further financial opening-up, what is the best choice for China's exchange-rate regime?Researches on preceding questions have theoretical and practical significance.This paper continues to explore specific and particular questions concerning China's foreign exchange梤ate regime choice in the process of further financial opening-up.l.The following assumptions are held in the process of China's further financial opening-up:Firstly, China is in the process of transition toward market economy. Secondly, capital flow is imperfect. While RMB advancing to a convertible currency under capital account, there exists imperfect substitutability between assets dominated in domestic currency and in foreign currency. This assumption is the basis for and an essential constraint of modeling China's foreign exchange-rate regime.2.China's resent exchange-rate regime, so called "manage floating regime" is in fact a fixed rate regime pegged to dollar, which has following disadvantages:(1) Owing to the difficulty in determining equilibrium exchange rate, the adjustments of exchange rate are not made on good grounds,(2)Excessive demand for foreign exchange will likely give rise to "rent seeking" behaviors, which increase transaction cost, resulting in net loss of social benefits.(3)The central bank's foreign exchange reserve is exposed to tremendous risk. Meanwhile, this kind of regime cannot meet the need for China's further financial opening-up in various aspects:(1)Under influence of various factors, the central bank is expected to find it increasingly harder to make out a right exchange rate, while the cost for doing so will be getting increasingly higher.(2) The central bank's ability to "ironing down", macroeconomic fluctuation by using its monetary policy is weakened.(3) Intrinsic instability.3.In the process of economic transition, considering the instability in macroeconomic expectation, the difference between the sensitivities with which financial and product market adjust to shocks, the difficulties of establishing a large and stable financial market while there exist lots of "noise traders", and the hardness of meeting requirements which ensure advantages of floating rate regime, in further financial opening-up China should not adopt a floating rate regime.Finally, in order to provide theoretic and reference for government's policymaking, this paper logically concludes that in further financial opening-up China should adopt an exchange rate target zone regime.