Chinese Exchange Rate Policy and the Role of Renminbi in the International Monetary System

The Chinese exchange rate regime has much fluctuated since the removal of the dollar peg in July 2005. Theoretically, it can be viewed as an “upward crawling peg” relative to a basket of currencies whose precise composition is not revealed. Here we estimate the composition of this basket over different periods and show that times of fast appreciation match a declining dollar weight in the basket. The “crawling appreciation” was meant to answer trade partners’ complaints about an undervalued renminbi giving rise to distortion of competition. After ten years of this regime, the undervaluation has been completely wiped off. The Chinese central bank is still closely monitoring the forex market, although the authorized volatility has increased. After fighting against upward market pressures through accumulating huge amounts of dollar reserves, the central bank must now tackle downward pressures and capital outflows, which result in loss of forex reserves. In parallel, exchange rate controls have been softened in order to promote the utilization of the renminbi by non-residents, particularly for the settlement of international trade. The Chinese authorities would like to benefit from an international currency, although they want to control every step of the financial opening. The inclusion of the renminbi in the special drawing rights (SDR) of the International Monetary Fund (IMF), which has been debated for years, would show the international recognition of the internationalization process.