The Research On The Reform Of RMB Exchange Rate Formation Mechanism

In recent years, as the impact of China economy on the world economy has grown, both the level of RMB exchange rate and the formation mechanism reform have become the focus of the world. From the fixed exchange rate system to the appreciation pressure, then to the mechanism reform with reference to a basket of currencies, these changes have reflected that RMB has a profound impact in the worldwide, and they also embody that the reasonable arrangements for the exchange rate regime are significant to the political and economic development of a country.The formation mechanism of RMB exchange rate is in fact the choice of exchange rate regime. This thesis mainly draws on the theories of the choice of exchange rate regime. Firstly, based on the evolution of RMB exchange rate system from 1949 to 2004, we give a deep analysis on the exchange rate mechanism which had been pegged to dollar for a long term. Then after the theoretical and empirical analysis, we come to the conclusion that such a system was inefficient to the macroeconomic policies, so this system should be reformed. Secondly, the paper has a comprehensive interpretation on the current RMB exchange rate formation mechanism reformed in July 2005, and analyzes this system from the point of the theory of Exit Strategy. Then this part takes a look on the economic impact from the macro and micro aspects caused by the appreciation of RMB. Finally, the thesis puts out that current mechanism carries a handful of drawbacks, for example, distortion of formation mechanism, rigidity of exchange rate, and higher maintenance cost. Under the new circumstances, perfection of the formation mechanism of RMB exchange rate is demanding at China's own will. And relevant supporting measures should also be given the highest priority.The improvement of RMB exchange rate system is a continuous process, along with the environment change. This system should be improved step by step under the economy development, taking account of the social and economic reality, ensuring no excessive volatility arises, while RMB exchange rate management and adjustment will also require considering the international factors integrated. We'll promote the reform further in the future, so as to form a more flexible RMB exchange rate formation mechanism, which is more responsive to the changes in market supply and demand.