Analysis On RMB Exchange Rate Regime With Managed Against A Basket Of Currencies

The contemporary international economic environment is complicated. The US Subprime Mortgage Crisis and Europe’s Debt Turmoil which it indirectly led shocked global financial markets. Major countries chose to interfere with the world capital market. The United States government launched the quantitative easing monetary policy, and the European Union used government leverage operations to expand capital. South Korea gave up the Asian currency swap agreements under pressure of domestic capital market hedge, and chose the dollar currency swaps so it might perform at a steady rate through the economic crisis. Up to now, the recovery of the euro zone countries is still slow and uneven. The uncertainty of the European debt crisis remains. The euro exchange rate fluctuated wildly. In contrast, the United States employment situation, private investment and exports are improved. The Federal Reserve System announced termination of quantitative easing monetary policy. Global capital recycled faster back to the US, which leads to lack of capital liquidity in some emerging economies and causes severe unstable exchange rate fluctuations. It impacts the exchange rate formation mechanism and worsens the benign development of the real economy. Thus, under the background of free flow of resources and integration in the global commodity market and capital market, research on national currencies importance increasingly highlight, the core of which is the country’s exchange rate and its fluctuation characteristics.Since the exchange rate reform in2005, China’s exchange rate mechanism is controversial. Our country has not been clear the composition and weight distribution in the exchange rate mechanism of the basket of currencies. The people’s bank of China revealed only basket selection principles and the weight distribution of basket. At present, China’s freely convertible under current account has been achieved, and the same under the financial capital account is gradually moving forward. China’s exchange rate regime is based on reference to a basket of currencies on the benchmark and the provisions of the floating range. It is widely believed that exchange rate mechanism lags behind the economic strength. Combined with the immaturity of China’s foreign exchange market, the inefficiency of the domestic economic structure, and the uncontrollability of short-term working capital, the exchange rate frequently floats cross-border. High frequency fluctuations in exchange rate significantly bring inconvenience to the foreign trade, increase the difficulty of regulation of the people’s bank of China, and contribute to the turbulence and instability of domestic financial market. In the aspect of capital market, it is important to promote the marketization of interest rate and RMB exchange rate reform, and explore benign efforts of China’s exchange rate formation mechanism. In conclusion, it is of great significance of using detailed data and scientific theory method to analyze the current exchange rate mechanism in currency basket structure and weight distribution, and researching on RMB exchange rate formation mechanism in scientific system of theoretical and empirical analysis. Not only for the government and the monetary authorities of exchange rate adjustment it has important reference meaning, but also for improving RMB exchange rate formation mechanism reform and macro-economic mediation ability, and enhancing China’s exchange rate policy. Thus this paper has both important theoretical and realistic significance.This paper analyzes the surrounding issues of exchange rate mechanism in our country, reviews the research results of scholars at home and abroad, and then reveals the research methods and ideas. Second it reviews the reform process of the RMB exchange rate system, and analyzes the present situation of the RMB exchange rate system. It gives clear concepts and characteristics of the reference to a basket of currencies exchange rate system in our country. According to the exchange rate regime model of pegging basket, combined with the actual situation, this paper constructs the model of reference to a basket of currencies and the correction model attached to Chinese foreign exchange reserve rate with the ratio of the money supply in China. Then the paper selects the data from July2005to March2005, divides into35day degrees data sets with its three months step cycle, and gets averaging104monthly data based on the arithmetic of monthly day degrees data. On the35sets of day degrees data for rolling regression analysis of the RMB exchange rate mechanism model, it is concluded that the dollar currency has been dominate our basket of currencies, other currencies also play a certain role, and the adjustment of the reference currency basket in China affected by the change of policy and economic situation at home and abroad. Accordingly it divides104monthly data into5groups and does regression analysis of China’s exchange rate mechanism model and its correction model separately. It is concluded that on the one hand, the influence of market supply and demand in China’s exchange rate reform initial period is positive, and in the late of the financial crisis it has negative effect. On the other hand, our country is based on market supply and demand, but manages in specific environmental conditions. Currently our country is gradually advancing the influence of market supply and demand for RMB exchange rate mechanism. According to the above analysis, the paper analyzes the yield of China’s exchange rate sequence in GARCH modeling, which is concluded that the sequence has peak, thick tail and wave agglomeration. In the end, this paper analyses further countermeasures and suggestions of the reform of RMB exchange rate mechanism.