Effectiveness Of China Foreign Exchange Market Sterilized Intervention

In 2005,China carried out the reform of the RMB exchange rate system.After the reform,China began to carry out a managed floating exchange rate regime.Its essence is to maintain exchange rate stability in the overall macroeconomic framework,so the central bank intervention in the foreign exchange market is essential.In addition to our huge foreign exchange accounts paragraph causes the base currency increase passively,we must be sterilized to prevent inflation and maintain the independence of monetary policy according to the foreign exchange market intervention.As a result,the effectiveness of the central bank sterilized intervention is vital to economy.According to the Investigation and Statistics Bureau of central bank released a report,China’s capital account liberalization process continues to accelerate,planning 5--10 years to achieve full capital account convertibility.But the liberalization of cross-border capital flows will take foreign exchange reserves and foreign exchange intervention band to a more uncertainty.In the rising trend of capital account openness,the effectiveness of foreign exchange sterilized intervention will face enormous challenges.The thesis is based on China’s macroeconomic trends to review 1994---2014 China’s foreign exchange sterilized intervention practice,refining the problems of Chinese foreign exchange market sterilized intervention and pointing out that the stated objectives of sterilized intervention.Using Mundell-Fleming model,trilemma theory,portfolio balance model explains sterilized intervention in the foreign exchange market in theory.Using January 2005-December 2015 monthly macroeconomic data on the full sample and sub-samples with the central bank reaction function,we get empirical results that the full sample(January 2005-December 2015)reversal coefficient is 72.8%,subsample one(January 2005-December 2010)reversal coefficient is 85.3%,subsample two(January 2011-December 2015)reversal coefficient is 56.1%.Subsample two reversal factor is not only much lower than the coefficient of subsample one,but also lower than full sample reversal coefficient.Considering the capital account liberalization of subsample two is higher than the subsample one,the increase of capital account opening reduce the effectiveness of sterilized intervention.According to the empirical results and the experience of United States,Japan and Brazil,the last chapter puts forward policy recommendations to improve the effectiveness of sterilized intervention.