The fifth anniversary of 8.11 exchange rate reform: three major changes in RMB exchange rate mechanism

 The fifth anniversary of 8.11 exchange rate reform: three major changes in RMB exchange rate mechanism

On August 11, 2015, the peoples Bank of China announced to improve the quotation mechanism of the RMB / USD exchange rate at the middle rate. Before the opening of the daily inter-bank foreign exchange market, market makers refer to the closing exchange rate of the previous days inter-bank foreign exchange market, comprehensively consider the supply and demand of foreign exchange and the changes in the exchange rates of major international currencies, and provide the China foreign exchange trading center with the middle rate quotation.

As for the macro-economic background of the exchange rate reform, Cao Yuanyuan said in an interview with the Securities Daily that China entered a period in 2015 when the stimulus effect of the financial crisis subsided, and the economic growth showed a central downward shift. At that time, the global monetary policy pattern was that the U.S. dollar entered the interest rate increase cycle, while Europe and Japan were still in the process of quantitative easing The currency has formed a certain degree of overvaluation. At a time when the overvalued RMB currency has a negative impact on Chinas economic growth trend, it has become a demand to change the previous RMB exchange rate single peg to the US dollar and refer to a broader basket of currencies, which coincides with the important period when the International Monetary Fund (IMF) considers whether to include RMB into the special drawing right (SDR) The 8.11 exchange rate reform of RMB marketization came into being at the right time.

Yuan Dongyang, general manager of the asset management and Investment Research Department of the Federal Reserve, analyzed to the Securities Daily that the implementation of the exchange rate reform at that time could, on the one hand, correct the excessive real exchange rate of RMB in a short period of time and make the exchange rate a tool to ease the pressure of capital outflow. On the other hand, in the medium and long term, both capital account opening and RMB internationalization need a relatively reasonable exchange rate as the basis. In order to realize the free flow of capital and maintain the independence of monetary policy, we must abandon the stability of exchange rate and implement the floating exchange rate system. Capital account opening and RMB internationalization involve cross-border capital flow. As a large economy, monetary policy must be independent, so the market-oriented reform of exchange rate is natural.

Hedging market sentiment Pro cyclical fluctuations

Over the past five years, the central bank has continued to promote the market-oriented reform of the exchange rate, improved the managed floating exchange rate system based on market supply and demand, adjusted by reference to a basket of currencies, maintained the flexibility of the RMB exchange rate, and played the role of the exchange rate in regulating the macro-economy and the automatic stabilizer of the balance of payments. At the same time, we should pay attention to the guidance of expectations and keep the RMB exchange rate basically stable at a reasonable and balanced level.

In Cao Yuanyuans view, the changes of RMB exchange rate mechanism after the exchange rate reform are as follows: first, in order to practice the managed floating exchange rate system, the Central Bank of China relies more on market means such as open market operation, and the deviation degree of RMBs real effective exchange rate from the equilibrium exchange rate has narrowed systematically; second, the establishment of the double anchor mechanism of closing price + exchange rate change of a basket of currencies Third, the weight of the US dollar in the CFETS basket was lowered. Among them, the central bank continued to promote the reform of the pricing mechanism of the intermediate price. The formation mechanism of the intermediate price changed from increasing the CFETS RMB exchange rate index to expanding a basket of currencies by the end of 2016, reducing the calculation period of the exchange rate of a basket of currencies in the middle and late February of 2017, and introducing the counter cyclical factor at the end of May 2017, finally forming the closing price + exchange rate change of a basket of currencies + reverse cycle The new pricing mechanism of factor can effectively hedge the pro cyclical fluctuation of market sentiment and enhance the autonomy of exchange rate regulation.

More challenges to exchange rate stability

Since the 8.11 exchange rate reform, the reform of RMB exchange rate formation mechanism has achieved remarkable results. In which direction should the reform continue?

In the future, the directional change of RMB exchange rate reform will show several characteristics, Cao Yuanyuan analyzed. Firstly, it is necessary to strengthen the role of market supply-demand contrast changes on the RMB exchange rate, weaken the central banks foreign exchange intervention, especially in the process of weakening the bottom line thinking of RMB exchange rate, not fixing the RMB exchange rate at a certain level; secondly, strengthening the expectation management To guide the market to establish a reasonable and stable expectation of RMB exchange rate, moderately expand the two-way fluctuation range of RMB exchange rate, and enhance the elasticity of RMB exchange rate; thirdly, the rhythm of exchange rate reform will still be mainly in line with domestic monetary policy objectives, and stable RMB exchange rate expectation is more important. Therefore, in order to ensure the independence of domestic monetary policy and establish stable expectation of RMB exchange rate, China will not open its capital account too quickly; fourthly, the exchange rate reform and RMB internationalization will go forward together, and with the purpose of enhancing the RMB exchange rate flexibility, China may have more attempts in promoting the two-way liquidity of cross-border funds, improving the offshore RMB liquidity, and enriching the RMB exchange rate derivatives market.

The exchange rate reform is not achieved overnight. The exchange rate is easy to overshoot. At present, maintaining the relative stability of the exchange rate is not only the need to maintain economic competitiveness, but also the need to stabilize confidence and expectations. Wang Youxin believes that in the future, Chinas economic development may face a more complex and changeable internal and external environment. As a link linking the domestic and foreign economies, the stability of the exchange rate will face more challenges.

Source of this article: Yang Qian, editor in charge of Securities Daily_ NF4425