China's Central Bank Foreign Exchange Market Intervention Effectiveness Research

The stabilization of exchange rate rate has an important impact on the foreign trade, macroeconomic development, social stability and international relations with country. Since the Bretton Woods system collapsed during1970s, varieties central banks began take part in intervention in the foreign exchange market, based on the different purposes, especially in sterilized intervention. China is no exception. Especially exchange rate reform in July2005, China began to implement market-based, with reference to a basket of currencies, the adjustment, managed floating exchange rate system, which gives the central bank intervention in foreign exchange markets more favorable advantages as well as greater challenges.Firstly, this paper introduced the theory of central bank intervention in foreign exchange market, and then reviewed the practice of China’s central bank intervention in the foreign exchange market, found there were some features and problems in the country’s central bank intervention in the market. Secondly, It selected the latest data after exchange rate reform of July2005, established the central bank reaction function and Use two-stage least squares method to test the goal and effectiveness of China’s central bank intervention in foreign exchange markets. Thirdly, This paper chosed the inverse function of the capital needs to test whether China’s central bank foreign exchange market intervention is effective through the portfolio channel, after analyzed whether the current condition of our country better satisfy the premise of the portfolio channel than another.The empirical results showed that China’s central bank intervention was leaning against the wind intervention and targeted interventions from July2007to July2007, however, targeted interventions from August2007to March2011. And China’s central bank tended to intervene in the appreciation of the RMB, and stand it is devalued. China’s central bank intervention in the foreign exchange market can change risk premium, and affected the spot rate and forward exchange rates, which proves our central bank foreign exchange market intervention is effective through Portfolio channel. But with the gradual relaxation of capital controls in China, the risk premium may be getting smaller, the portfolio effect will be smaller.Finally, I summaried the empirical results, and signed on policy recommendations about how to improve the operation of China’s central bank intervention in the foreign exchange market, including deepening the reform of the foreign exchange market, accelerating market-oriented interest rate reform, establishing a wide range of foreign exchange management system, expanding the RMB exchange rate floating range, flexibility chooseing the combination of a variety of intervention tools and strengthening international coordination and cooperation.