It appears that Chinese officials favor maintaining a high growth rate in GDP terms while risking inflationary price pressures over the long-term. Singapore and Thailand are often cited as examples of countries in Asia that have exchange rates systems similar to a BBC. Moreover, the system prevents speculators from knowing how authorities would react to movements in market exchange rates, thus reducing the likelihood of currency attacks. This system maintains a country’s export competitiveness while tracking the currency trends of its major trading partners. The difference lies with allowing for greater fluctuations in the short-term. In a “basket band crawl” (BBC), the effective exchange rate is also based on a basket of currencies of major trading partners. Conversely, if the main currency depreciates against other currencies in the basket, the domestic currency is revalued against the main currency to maintain a stable effective exchange rate. Fifth, if the main currency appreciates against other currencies in the basket, the central bank would intervene to stabilize the effective rate and ensure that the domestic currency depreciates against the main currency.Fourth, the PBOC stabilizes the effective exchange rate by intervening the rate of the domestic currency against the main currency in the foreign exchange market.Third, the PBOC selects the main currency and assigns the highest percentage weight.trade gap imbalances with China may widen further as variables in the currency regime are changed. Nonetheless, in the long-term, Japan and the U.S. balance of trade would be minimal at least. In the short-term, the impact on Japan and the U.S. If we were to factor just on the balance of trade, heavier weights would more than likely be assigned to the U.S dollar, Japanese yen and Hong Kong dollar in that order. Typically, the countries’ major trading partners are selected. Second, the PBOC assigns a weighting scheme to selected foreign currencies involved in the basket.First, the PBOC agrees to an objective in stabilizing the effective exchange rate.In order to better understand the crawling managed float, it would be beneficial to explore examples of both currency methods: the managed float regime and BBC system.Ī managed float currency exchange rate regime involves the following steps: In both methods, all variables(3) remain the same except for the change in the target currency from the U.S. Thus, this combined system could be termed a “crawling managed float” which consists of the managed float system and a “basket band crawling system” (BBC). In fact, Chinese authorities have never abandoned the previous exchange rate regime of the peg but instead, maintained the current managed float system while making minor changes to certain variables. Is the new currency exchange regime more flexible? Was there really ever a deviation in the structure of the exchange rate regime to a managed float system?Īt first glance, it could be reasoned that the new currency rate regime is not as flexible as the previous one, but is instead a combination of two currency exchange rate methods with similar structures. The PBOC would also make adjustments to the RMB exchange rate band, when necessary, according to market developments as well as the economic and financial situation. dollar currencies against the RMB would be allowed to move within a certain band announced by the PBOC. dollar against the RMB in the inter-bank foreign exchange market would continue to float within a 0.3 percent band around the official parity published by the PBOC. Nevertheless, the daily trading price of the U.S. Moreover, the closing rate at the end of each trading day would become the central rate for a trading band on the following day.
In essence, the Renminbi (RMB) would be re-valued by about 2 percent to 8.11 yuan per U.S. dollar to a basket of currencies based on market supply and demand. On this day, the “People’s Bank of China” (PBOC), with the authorization of the State Council (1), announced China’s new exchange rate regime from a peg to the U.S. China’s Exchange Rate Regime: A Crawling Managed Floatįor most professionals in the financial industry, July 21, 2005, was a historic day.
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