Reference To A Basket Of Currencies

Exchange rate system is an important component of the country's economy, an appropriate exchange rate system is one of the most important conditions for economic growth. Since 1994, RMB tended to peg to the dollar, this has created a favorable condition for China's economy development for ten years. However, with increasing levels of economic liberalization, China's economy is a deeper integration into the world economic system, especially after China has joined WTO. However, the domestic economy will inevitably face the volatility of the international market shocks. In this new situation, the effectiveness and stability of the pegged exchange rate system will be more rigorous testing. It is urgent and necessary to reform the pegging exchange rate system. Since July 21, 2005, China has begun to implement a managed floating exchange rate system with reference to a basket of currencies to adjust, which is based on market supply and demand, the RMB exchange rate is no longer pegging to a single dollar. However, the reform has only just begun, the RMB exchange rate formation mechanism is not yet perfect, in this case, further reform of the exchange rate system is necessary. This article is mainly based on the background of an open economy, it focus on the disharmony between pegging exchange rate system and china's economy, and consider the various characteristics of the exchange rate system with reference to a basket of currencies, and discuss the specific arrangements for the exchange rate of RMB, and at last it gives the reform policy and other related arrangements. The full text is divided into four chapters:Chapter one is about the evolution of RMB exchange rate system. In this chapter, the history of the reform of RMB exchange rate system is divided into three parts according to time, and it gives briefly comment for every stage of the RMB exchange rate system. Then, according to the exchange rate between RMB and dollar in the market after the Asian financial crisis, it analyzes the formation and maintenance of a single dollar-pegged mechanism; finally it draws a picture of the reform on July 21, 2005 and gives a brief comment. Chapter two is that a single dollar-pegged mechanism of RMB cannot be held long. This chapter gives the reasons of why single dollar-pegged mechanism of RMB cannot be held long. First, starting from the inner contradictions of pegging the exchange rate, it asserts the illness of the pegging exchange rate system theoretically; then it compares the revenues and the costs of the pegging of RMB, come to the conclusion of the current high cost of being pegged to the dollar; Finally considering the pressure and the situation of China, it is impossible for RMB to peg to dollar for long.Chapter three is the Analysis of the RMB exchange rate system reform. It gives a systematic analysis of the reform of current RMB exchange rate system. This reform is applicable for our country. Then it comments on the features of our system compared with the system of pegging a basket of currencies. These characteristics give China more decision-making space, but also bring the possibility of a return to pegging to the dollar. Then it uses Franel and Wei's model in 1994 to test the weight of currencies in the basket of RMB, and get the collusion that, at present, the RMB could be considered as "soft pegging" to the dollar. And at last, it gives the real difficulties for RMB to withdraw from the pegging exchange rate system.Chapter four is the choice of the RMB exchange rate system and policy recommendations for the future. This reform is just an episode in the long road for RMB to float by itself. It is decided by the inherent advantages of the floating exchange rate system and China's economic development. It begins with that a floating exchange rate system is the long-term objective of the RMB exchange rate system, and it gives the reasons of that, the floating exchange rate system meets the various needs of our economic policies; Finally, it comments on the supporting policies and institutional arrangements for the arrangement of the floating system of RMB.