What Is the Real Strategy of Currency Basket of RMB?

The People’s Bank of China has adopted twice (July 2005-summer 2008 and June 2010-today) currency basket as exchange regime. No information related to composition or functioning of the basket is known. In this paper, we try to estimate in a dynamic approach its composition. The results show in each period, the exchange regime resembles rather a crawling peg vis-à-vis US dollar. The crawling peg permits gradual appreciation of the RMB and its flexibilization. It seems also that the pace of RMB’s appreciation would be regulated so in order to absorb pass-through effect of international commodity price on domestic inflation. Finally, because of the opacity on basket’s functioning, the currency basket is only a form allowing flexibility within the meaning of room of manoeuvre of the Central Bank; it is also a transition regime toward free floating.