Managing the Renminbi since 2005

Conventional wisdom is that the renminbi exchange rate since mid 2005 has been no more than a simple (crawling) dollar peg. We instead interpret the Chinese authorities as having made the transition away from a crawl or stall against the US dollar or having at least conducted a sustained experiment in a basket management in the period of 2006-2008. The Chinese bilateral dollar exchange rate is not representative of the renminbi management since 2005, the SDR is more representative, while the BIS effective index is the most representative of the three. As it happens, the euro/renminbi rate was representative of the renminbi’s broader movements between June 2005 and December 2010. Moreover, the nominal exchange rate is not the full story of the Chinese exchange rate policy. Since prices have risen faster in China than in its trading partners, the real rise of the renminbi over the period June 2005 to December 2010 has been about 10% larger than its nominal rise. As it happens, the real rise against the euro was also representative of the renminbi’s broader movements.