| The exchange rate of RMB got mostly attention in 2003. The focuses of the debate about exchange rate of RMB are the level and system of exchange rate, which are exactly reflected by formative mechanism of exchange rate. Therefore, the paper analyzes the shortcomings of exchange rate mechanism and presents the settlement for these problems above. At the beginning of the article, the author introduces the three schools of though about RMB exchange rate theory. Those are the value-increasing theory, value-fixed theory and value-free theory. The divergences of the three opposite theories stem from the different attitudes to the level and system of exchange rate. The mistakes of value-increasing theory and value-fixed theory are to settle with exchange rate level, though they find the key questions are about both of the level and system of exchange rate. I am inclined to the standpoint of value-free theory. I think that the value of RMB rate level is underestimated. Our government implements the single, managed value-free exchange rate system that based on the requirement and supply of the finance market. But in fact, the system is appearing characteristics of the arrangements of fixed peg dollar. To settle the problems of the level and system of exchange rate, we must find out the source of them. The author researches the RMB exchange rate system in the part three of this paper. Combining with the theory of the choice of exchange rate regime, reviewing the changes of exchange rate regime, we can conclude that the choice of exchange rate regime must accommodate the situation of economic development. The exchange rate mentioned above is suit for the economic conditions of our country. The mechanism of exchange rate is the representation of the exchange rate system. The exchange rate of RMB was almost fixed since 1997, and similar to fixed arrangements. This kind of departure of exchange rate stems from the mechanism of exchange rate. From the analysis above, we find out the two directions of RMB exchange rate(level and system) are focused on the mechanism of exchange rate which can be the breach of the reform. The mechanism of exchange rate of RMB has some problems that are followed. The first one is that the foreign exchange market is imperfect. The foreign exchange market includes Banking Market and Retail Market. There are some defects in the two markets of China. First, The main question of Banking Foreign Exchange Market in China is the limit of sell of foreign exchange. The commercial banks in China cannot choose the time and quantity of foreign exchange according to the forecast of the demand and trend of exchange rate in future when they would like to sell the foreign exchange by themselves. This policy bereaves the trade rights of the commercial banks so the exchange rate doesn't reflect the market price. In additional, the Central Bank buys the all of open supplying money so it is the final and largest buyer in the currency market. This policy disturbs the independence of the currency system. Second, the main problem on the China Retail Market is the limit of selling the foreign exchange forcibly. In China the Sino-enterprises must sell the foreign exchange to the indicated bank except for the non-trade and non-work earning. If the enterprises need the foreign exchange, they must buy it in the indicated bank by quota credence. The kinds of policy of sell and buy for foreign exchange distort the form of marketable exchange rate. Third, the limit of exchange rate floating results in the elasticity lacking of exchange rate change. According to the regulation of the Central Bank, the indicated foreign exchange bank can sell and buy USD every day, and the rate price can float within 0.3% of the basic rate. Meanwhile the rate price of Hong Kong Dollar, Japanese Yen and Euro can float within 0.1% of the basic rate. On the retail market, the sell price and buy price of foreign exchange, including USD, Hong Kong Dollar, Japanese Yen and Euro, can float within 0.25% of the published basic rate...
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