RMB Exchange Rate Formation Mechanism

With high economic integration in today, the choice and adjustment of a country’sexchange rate system plays an important role on both national and global economic growth.As an economic power, China’s choice of exchange rate regime will have a far-reachingimpact on the world economy. On July21,2005, Chinese government reformed the RMBexchange rate system. RMB exchange rate was adjusted from a single pegged against theUS dollar to a floating exchange rate system with being managed and referencing to abasket of currencies, which basing on both market supply and demand. After the reformabout the RMB exchange rate system, our country’s economy has achieved rapiddevelopment, the trade balance surplus has a big increase, and the foreign exchangereserves also has a great rise. The international balance of payments maintained "doublesurplus" situation for a long time, and thepressurethat RMB would be appreciated hasgradually become higher than before.This reform has been nine years, with increasing marketization degree and flexibilityof the RMB exchange rate. As of July2013, yuan-dollar exchange rate accumulatedrevaluation close to34%, the RMB exchange rate is close to equilibrium level. In order tofurther improve the exchange rate formation mechanism, since April16,2012, the floatingof marketing price of the US dollar against the RMB in inter-bank spot foreign exchangemarket ranges from five over one thousand to one percent. The change of RMB exchangerate has present a two-way floating characteristics in2012, the flexible of exchange rateenhanced obviously, price has also been effectively controlled. The reform of RMBexchange rate system has effectively alleviated the pressure of RMB appreciation, reducingthe level of inflation and promoting the development process of our country’s economic.The paper was based on the changes and theoretical study of international exchangerate system to analyses the actual situation in China. The paper expounded theachievements the current RMB exchange rate system made, regression analysis was carriedout about reference to the RMB currency basket by the model of Frankel and Wei model,the weight of dollar has been reduced in the basket, other currencies have certain effects onthe formation of the RMB exchange rate. Although the reform of exchange rate system hasmade great achievements, there are still some problems existed. By analyzing theshortcomings it had and the influences it made on both macroeconomic andmicroeconomic subject, the paper discussed the future trend of RMB exchange rate formation mechanism reform, and put forward the relevant policies and advices.