Analysis Of The Currency Basket That RMB Was Managed Against

On the Jul. 21, 2005, People's Bank of China declared that the exchangerate regime of RMB would change from pegging USD into be managedagainst a basket of currencies, without publicizing the structure of thecurrency basket. As a result, RMB became the focus. The paper wasconceived, compiled and finished under this background.At first, the definition of pegging a basket of currencies was delivered,which is followed by the analysis of which currencies should composethe basket. Several factors was advanced in this analysis. Six currencies— USD, JPY, EUR, AUD, GBP and CAD was deemed to compose thecurrency basket that the exchange rate of RMB is related.Subsequently, the analysis was transferred to the aspect of optimalweights of these six currencies in the currency basket. Trade balance waschosen as the target function regarding the reality of China and the modelwas decided. Taking corresponding data over the model, the resultappeared that USD accounts for over 60%, EUR and JPY over 10%respectively. On the other hand, GBP, AUD and CAD also totaled 10%.Since the model was theoretical, some problems that may appear in thereal work were brought out as a supplement of this analysis.Last but not least, the truth is that the exchange rate of RMB usedSingapore's successful experience for reference. So the tips of suggestionwere expected to be useful to PBC, at least to a certain extent.