The ultimate goal of reform? The ultimate reform goal of RMB exchange rate formation mechanism in China is to implement a more flexible exchange rate formation mechanism, which we think is a good direction. In the long run, the floating exchange rate mechanism will give the China government completely independent monetary policy freedom, while avoiding economic recession like the Asian financial crisis. The economic crisis of most emerging market economies comes from trying to implement a fixed exchange rate mechanism for a long time, which will lead to uncoordinated and contradictory domestic policies. As we thought, such reform will gradually (but for a long time) make China's economy move towards a completely floating exchange rate formation mechanism.
Why change now? The following factors played a decisive role.
Function: government departments have quietly strengthened the construction of currency trading technology and platform, which is helpful to improve China's economy to cope with fluctuations caused by exchange rate changes. Second, China's external imbalance has intensified, the trade surplus has increased rapidly, foreign exchange reserves have increased too fast, and monetary policy has failed; In the past year, government departments were worried that the trade surplus was only temporary, but now they are not so worried. Third, external political pressure is increasing rapidly, especially the United States, which is trying to launch a series of trade protection mechanisms this fall. Finally, we always think that this summer is a good time for change, because market speculation and capital flow are often the lowest from June to September.
Do government departments use exchange rate to cool down the overheating of economic growth? No, some observers linked the recently released semi-annual report data with the RMB exchange rate reform, and suggested that China should reform the RMB exchange rate formation mechanism, because the economic growth exceeded expectations. We don't think these data will help. From the beginning, the government never linked the RMB exchange rate to the macroeconomic cyclical policy. Moreover, government departments have always believed that the economic growth rate is very high, and all actions show that the economic growth in the past 12 months is much slower than before, and the pressure of inflation is also easing; If government departments use the change of RMB exchange rate policy to cool the overheated economy, the end of 2003 is a more logical time. Finally, in the short term, the change of 2% is very small for China's economy.
American pressure played a key role? Even the US Congress does not believe this. We believe that the U.S. Treasury's trade protection measures and the bills of the White House and Congress may affect the time for China to reform the exchange rate formation mechanism. However, we don't think the American demand for goods from China will decrease. The adjustment of RMB exchange rate policy is in line with China's long-term interests.
How to peg to a basket of currencies? The concept is simple: in the past, the RMB has always been pegged to the US dollar, which means that the RMB will change with the US dollar, regardless of the euro, Japanese yen and other currencies. Now, if the exchange rates of the euro and the yen against the US dollar have changed, the RMB exchange rate should be adjusted accordingly according to the arrangement of trade weights. For example, the euro accounts for 20% of the currency weight of a basket of RMB, and the euro appreciates 10% against the US dollar, then
The RMB will appreciate by 2% against the US dollar and depreciate by 8% against the Euro (assuming other currencies remain unchanged against the US dollar).