Abstract
We provide a review and empirical study on the exchange rate system reform in China. In the initial stage of the reform the Chinese central bank PBoC’s implicit promise of gradual appreciation helped to contain the appreciation rate and volatility of the renminbi. Subsequently, under US pressure for faster appreciation and hence the PBoC’s moderate violation of the implicit promise, there was a significant rise in the appreciation rate and the volatility of the renminbi. The moderate violation deteriorated further, forming a vicious cycle of speculative flows and faster exchange rate changes. Upon the onset of the global financial crisis in 2008, the threatening appreciation and volatility alleviated when the PBoC returned to the implicit stance of gradual appreciation or stable renminbi. We found that in the first ten years of the reform the PBoC did not shift its monitoring target from the RMB–USD rate to the nominal effective exchange rate. This may be one of the underlying causes of the renminbi crisis in 2015.
