The Choice Of RMB Exchange Rate Regime With The Anchor To The Price Index Of A Basket Of Goods

The appreciation pressure of RMB exchange rate and the significant fluctuations ofdomestic commodity prices have been two co-exist major challenges in China’s economicdevelopment. Changes of RMB exchange rate on domestic economic life begin tohighlight, which has affected foreign trade from import to export enterprises and domesticresidents’ daily lives greatly. The paper is precisely in this context analyzing the RMBexchange rate regime with the anchor to the price index of a basket of goods as well as itsmechanism of action, advantages and disadvantages through theoretical and empiricalresearch. The purpose of this paper is to stable RMB index anchor by regulating the levelof the RMB exchange rate, to stabilize domestic prices of basic subsistence, provide asteady adjustment mechanism for the development of the domestic economy, and toprovide a reference for the central bank’s exchange rate policy.In order to find the internal mechanism of the RMB, the paper reviews the study ofChina’s exchange rate system on the basis of former papers. The paper introduces thecontinuous contracts trading prices of four domestic futures and spot exchanges replacingthe prices of the40items in the basket, has the result of weighted price index of a basket ofgoods, which is the anchor of RMB. After setting the freely floating range， we can getthe trend of RMB determined by supply and demand in the market. Then based on theinitial exchange rate of RMB, we can discount the exchange rate with the anchor of priceindex of RMB against major currencies, which compared with the RMB exchange rateunder the current system.From the empirical results, the increasing volatility of exchange rate will not affectthe purchasing power of the RMB against the basket of goods, although the RMBexchange rate of the price index against major foreign currencies has greater volatility thanthe current exchange rate, which is because the anchor of RMB is the basket of goods priceindex. And if the categories of items in the basket are rich enough to meet the demand ofenterprises’ production and inhabitant’ living, the impact of RMB exchange rate againstmajor foreign currencies fluctuations on domestic economic life will be very weak.Therefore, the conclusions of this study is that the RMB exchange rate regime with the anchor to the price index of a basket of goods is more conducive to the development of thedomestic economy relative to the current policy with the anchor of a basket of currencies.In the case of the purchasing power of RMB unchanged, changes of exchange rate againstthe foreign currencies are changes of foreign currency purchasing power for goods actually,which leads to the impact on China’s economy is minimal.