IDEAS home Printed from https://ideas.repec.org/p/nan/wpaper/1710.html
   My bibliography  Save this paper

The Exchange Rate System Reform in China: US Pressure, Implicit Gradual Appreciation and Explicit Exchange Rate Bands

Author

Listed:
  • Paul S. L. Yip

    (Department of Economics, Nanyang Technological University, Singapore)

  • Yiu-Kuen Tse

    (School of Economics, Singapore Management University, Singapore)

  • Yingjie Dong

    (Business School, University of International Business and Economics, Beijing)

Abstract

This paper provides a review and empirical investigation of the exchange rate system reform in China over the period between July 2005 and January 2017. We describe the People's Bank of China's (PBoC's) initial achievements and subsequent mistakes in the reform. We note that the central bank's initial honoring of its implicit indication of gradual appreciation played a significant role in its success in the reform initially. However, because of the US pressure for faster renminbi (RMB) appreciation, the PBoC's subsequent violation of the implicit indication of gradual appreci- ation triggered substantial speculative in ows and hence excessive RMB appreciation and volatility between March 2006 and July 2008. We find that during the first ten years of the reform, the PBoC was actually monitoring the RMB-USD exchange rate instead of the nominal elective exchange rate (NEER). This policy failure was one of the reasons for the substantial drop in China's foreign reserves amid the strengthening of the USD between 2014 and early 2017. The PBoC's mini deval- uation on 11 August 2015 was another mistake that had thereafter triggered sharp depreciation and high volatility of the RMB. On the other hand, the several incidences of widening of the RMB-USD exchange rate band over the sampling period was found to have only relatively mild e ect on the volatility of the RMB.

Suggested Citation

  • Paul S. L. Yip & Yiu-Kuen Tse & Yingjie Dong, 2017. "The Exchange Rate System Reform in China: US Pressure, Implicit Gradual Appreciation and Explicit Exchange Rate Bands," Economic Growth Centre Working Paper Series 1710, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
  • Handle: RePEc:nan:wpaper:1710
    as

    Download full text from publisher

    File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2017/2017-10.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Michael Funke & Jörg Rahn, 2005. "Just How Undervalued is the Chinese Renminbi?," The World Economy, Wiley Blackwell, vol. 28(4), pages 465-489, April.
    2. repec:wsi:serxxx:v:50:y:2005:i:spec0:n:s0217590805002153 is not listed on IDEAS
    3. Cheung, Yin-Wong & Chinn, Menzie D. & Fujii, Eiji, 2007. "The overvaluation of Renminbi undervaluation," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 762-785, September.
    4. Frankel, Jeffrey, 2004. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adustment under a Flexible Rate," Working Paper Series rwp04-037, Harvard University, John F. Kennedy School of Government.
    5. Chang, Gene Hsin & Shao, Qin, 2004. "How much is the Chinese currency undervalued? A quantitative estimation," China Economic Review, Elsevier, vol. 15(3), pages 366-371.
    6. McKinnon Ronald I, 2006. "China's New Exchange Rate Policy: Will China Follow Japan into a Liquidity Trap?," The Economists' Voice, De Gruyter, vol. 3(5), pages 1-7, April.
    7. Tse, Y. K. & Yip, Paul S. L., 2003. "The impacts of Hong Kong's Currency Board reforms on the interbank market," Journal of Banking & Finance, Elsevier, vol. 27(12), pages 2273-2296, December.
    8. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    fixed exchange rate system; GARCH model; nominal e ective exchange rate; renminbi;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nan:wpaper:1710. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Magdalene Lim). General contact details of provider: http://edirc.repec.org/data/dentusg.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.