The Regime Of Pegging A Basket Of Currencies And Its Adoption In China

On July 21, 2005, People's Bank of China declared that the exchange rate regime of RMB would be changed from pegging USD into being managed against a basket of currencies. Pegging a basket of currencies has been becoming the underlying mechanism of RMB exchange rate. Therefore, how to insure that China is able to successfully adopt this exchange rate regime and influence its economy growth becomes a subject of both theoretical and practicing significance. Toward this end, the overall objective of this dissertation was to study the theory of pegging to a basket currencies exchange rate system and its practicing experience by using the methods of standardized analysis and empirical analysis.Five specific chapters are covered in this dissertation. In the first chapter, the theory of pegging to a basket of currencies exchange rate system was elaborated. In the second chapter, the experience of those countries who adopted this exchange rate system, such as that of Singapore was summarized, which China could learn from. In the third chapter, the reason that China decided to adopt pegging a basket of currencies exchange rate system was discussed from the views of both the evolution of the RMB exchange rate system and the theory of pegging to a basket of currencies exchange rate system. In the fourth chapter, China's 2005 reform of exchange rate was empirical analyzed. The empirical analysis includes tow parts, the analysis of the RMB exchange rate movements and the analysis of the impact of choosing a basket of currencies on the trade balance. These analysis lead to conclusion that the exchange rate system reform indeed stabilized the exchange rate of RMB's nominal effective exchange rate and enhanced RMB's independence, but it didn't change the trend of expansion of China's trade surplus. This conclusion suggests that RMB's exchange rate formation mechanism should be continually improved. In the fifth chapter, based on the empirical analysis the direction of the exchange rate reform was speculated.