Efficiency Of Foreign Exchange Intervention And Chinese Practice

The exchange rate regime today in China is based on the framework of the "market-based, single, managed floating rate regime" that was set up in 1994. In the fact, the actual exchange rate regime is quite different from the "market-based and managed floating rate regime". Exchange rate decided by the Foreign Exchange Trading Center deviates seriously with the balance of payments surplus. But the exchange rate of RMB to US dollar hasn't changed for many years. And that is the result of foreign exchange intervention of central bank of China, and also one of the reasons for international pressure for RMB to up valuation.China went through reform on exchange rate regime again on July, 2005. By renewing managed floating regime, the new regime emphasized exchange rate should be formed by market, which provided more room and more flexibility for central bank intervention as well as challenged its efficiency. How to implement and improve foreign exchange intervention to achieve optimal efficiency is an urgent problem for central bank. Based on current background and historical experiences, the thesis adopts both qualitative and quantitative analysis and explores both theoretical and empirical methods to study the performance of central bank intervention in China, which provides some practical guidance for optimizing intervention policy.The thesis focused on efficiency of foreign exchange intervention. First, starting with relative theory of foreign exchange intervention, the thesis reviewed plentiful theoretical and empirical literature to explore theoretical support of foreign exchange intervention and establish theoretical foundation for latter research on efficiency. Second, the thesis looked over the practices and performances of foreign exchange intervention of China since 1994, and analyzed the efficiency of foreign exchange intervention in China. Last, by comparing several countries, and based on previous result, the thesis discusses strategy of foreign exchange intervention to maximize benefits and provides final conclusion.