Study On Reforming RMB Exchange Rate Regime

The debt crisis and the monetary crisis in the 1980s in Latin America and the Asian financial crisis commencing in Thailand in the 1990s have illuminated us that improper adoption of exchange rate regime can trigger financial crisis or even economic crisis. After the crises, many economists along with the central banks have made serious reconsiderations to the selection of exchange rate system. The traditional view holds that the free-floating exchange rate regime plays an active role in promoting effective resource allocation, ensuring the independence of monetary policies, buffering external impact as well as creating stable monetary environment for the fixed exchange rate regime. However, the traditional conclusions can not apply to the facts that emerged in the last two decades. So more research should be done to the exchange rate regime. China as a member of WTO is now at a crucial moment from the planned economy to the market economy. With the coming out of QFII and the brewing institutional innovations like QDII and CDR, the RMB exchange rate regime is facing an environment of more openness and more financial liquidity. On the basis of different exchange rate selection theories, this paper investigates the characteristics of international exchange rate regime which tends to be more flexible and polarized from a conciliatory perspective between the long-term reform objective and the short-term realistic choice. A new reform plan of the RMB exchange rate regime is also brought forward.Current RMB exchange rate regime is in fact a kind of fixed regime pegged to US dollar, which made great contributions to the prosperity of China's economy accompanied with capital control when China's capital accounts are not open. Nevertheless, with the enhancement of the international financial liquidity, its abuses began to emerge. Because the current regime is pegged to the US dollar, it can't reflect the actual supply-demand situation, the monetary policies are influenced by the fluctuation of US dollar and the probability of financial crisis is increased due to the asymmetry between foreign exchange speculation and risk. Hence the RMB exchangeABSTRACTrate should be reformed and the destination is the free-floating regime in the long run. But when China gives up present exchange rate regime to new one, we must take such factors into account as financial fragility and little financial implementation which also exist in many other emerging markets. So the transition should focus mainly on stability. The BBC(basket, band and crawl)rules maybe a nice short and mid-term choice. And to perform the "Exit Problem" perfectly, the following measures are necessary: hedge, capital control and the maybe most important one, the reformed currency policy.