The Research On Fear Of Floating And The Reform Of RMB Exchange Rate Regime

In this thesis, the theoretical connotation and the reason for“the Fear of Floating Hypothesis” is explained, as well as the impact of this phenomenon on macro-economy. By examining the degree of RMB exchange rate flexibility during the period from July 2005 to May 2015,it was found that after the 2008 financial crisis, the US dollar’s weight in the RMB currency basket were rising gradually, the fluctuations of exchange rate was low, and the monetary authorities used foreign exchange reserve to intervene exchange rate in the foreign exchange market. These confirmed the existence of “Fear of Floating” symptoms in China. This phenomenon is related to China’s export-oriented strategy, the force of attracting foreign direct investment, and it is subject to the constraints of the imperfect of foreign exchange market and financial system. The empirical test between currency fluctuation and macroeconomic indicators shows that the increasing flexibility of RMB exchange rate regime would help to attract foreign direct investment for China and to curb domestic inflation, it is infeasible to increase export through devaluation.Finally, based on the theoretical and empirical analysis, the thesis put forwards some policy recommendations on overcoming “Fear of Floating”. At the current stage, China should introduce the “wide range fluctuation” exchange rate mechanism firstly, it means to peg for a basket of currencies and broaden the fluctuation of exchange rate at the same time. The exchange rate would be dominated by market supply and demand, thereby reducing the foreign exchange reserve consumption, providing a broader space for monetary policy, and laying the foundation for the further opening of capital markets and the internationalization of RMB.