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This paper examines structural changes in China's exchange rate mechanism. For this purpose, we propose a predictive model incorporating three factors that influence the central parity rate: a smoothing factor, a market factor, and a basket factor. We first apply the model to analyze the effects of 12 exchange rate reforms since 2005, treating these reforms as predetermined structural breaks. Among other results, we find that the main impact of introducing a “counter‐cyclical factor” is to weaken the role of the basket factor. We estimate structural breaks in data, assuming that the number and dates of breaks are unknown, and we find that, although the majority of estimated breaks occur within the neighborhood of exchange rate reforms, there are breaks due to other external shocks such as the escalation of the China–US trade conflict in May 2019. It is suggested that our model may be used to guide future currency reforms in China.

This paper investigates the effects of the renminbi (RMB) exchange rate on trade prices and volumes in selected Belt and Road Initiative (BRI) countries in comparison with the effects of the US dollar. The stylized facts show that the RMB is underused in bilateral trade with selected BRI countries where intermediate goods dominate. By estimating the level of exchange rate pass‐through and trade volume elasticity, we find that the RMB is significantly correlated with the volume of imports in the sample countries, predicted by the producer currency pricing (PCP) paradigm. We also regroup intermediate and final goods between China and the BRI countries. The evidence shows that dollar fluctuation affects export volumes, reflecting the role of the US as a final goods destination, whereas the RMB exerts a significant impact on the volume of intermediate goods imported from China to the sample countries due to China's important position in global value chains.

With the gradual promotion of market‐oriented reform of the RMB exchange rate, the fluctuation range of the RMB exchange rate is increasing. How to deal with the impact of exchange rate volatility on Chinese exports is an important challenge faced by China. This paper finds that although exchange rate volatility, as a whole, has a negative impact on exports, high‐productivity exporters are less prone to exchange rate volatility shock in both intensive and extensive margins. As high‐productivity firms are less affected by exchange rate risk, they account for larger market shares. This paper, from a new perspective, provides evidence that increasing productivity helps mitigate the negative impact of exchange volatility on exports.

This paper studies the ongoing diffusion of renminbi (RMB) trading across the globe, the first of such research of an international currency. It analyses the distribution in offshore RMB trading in 2013 and 2016 using comprehensive data from the Triennial Central Bank Survey of foreign exchange markets. In 2013, Asian centers favored by the policy of RMB internationalization had disproportionate shares in global RMB trading. Over the following three years, RMB trading seemed to converge to the spatial pattern of all currencies, with a half‐life of seven to eight years. The previously most traded emerging market currency, the Mexican peso, shows a similar pattern, although it is converging to the global norm more slowly. Three other emerging market currencies show a qualitatively similar evolution in the geography of their offshore trading. Overall, the RMB's internationalization is tracing an arc from the influence of administrative measures to the working of market forces.

In the present paper we explore the internationalization of the renminbi with reference to the experiences of other monetary powers, and discuss its determinants, prospects and implications for China's development in the “new normal.” Specifically, after summarizing the major progress made thus far, we conduct a regression analysis, showing that economic size and financial conditions are significant determinants of the international currency status, while inertia and other unobserved factors also play important roles. These empirical findings enable us to undertake a scenario analysis focusing on the renminbi's potential to become a global reserve currency. Based on this quantitative research, we then revisit China's policy initiatives designed to promote its currency overseas. In our view, the internationalization of the renminbi, along with financial deepening and liberalization, should be regarded as a means to achieve China's goal of reaching a more sustainable and balanced model of development.

Persistent renminbi (RMB) devaluation expectations are one of the greatest threats to China's macroeconomic stability. Market interventions backed by huge foreign exchange reserves and capital controls are not sufficient to eliminate the expectations of devaluation. Creating a market-based and flexible RMB exchange rate regime holds the key to the elimination of devaluation expectations. The present paper compares the pros and cons of several policy options, and proposes to introduce, as a transition to free floating, a new exchange rate regime pegged to a currency basket with a wide band. The new regime should be able to give the RMB exchange rate enough flexibility to eliminate devaluation expectations as well as prevent excessive overshooting. To ensure a smooth transition, the new regime needs to be supported by controlling cross-border capital flows.

In 2014, the amount of RMB cross-border settlement had reached RMB7.6tn. It is important to evaluate the potential influence of RMB internationalization on China's macroeconomy. In the present study, a framework that includes monetary supply and demand was created to analyze the influences of RMB cross-border settlement on China's domestic interest rate, asset price and foreign exchange reserves. It is found that RMB settlement in different BOP items leads to very different effects on China's real economy and the financial market. Based on the analysis, we provide a framework of the policy priorities for RMB internationalization, with the RMB cross-border settlement items divided into three groups with different priorities. Meanwhile, to support RMB internationalization, exchange rate reforms should be adopted as a priority and a prudent attitude maintained regarding capital account liberalization.

Since the financial crisis hit in 2007, the US dollar privilege has not only become “exorbitant” but “extortianate.” Countries such as China are no longer willing to allow the USA to exercise this extortionate behavior. The potential geopolitical implications of a US dollar decline are immense. The USA would lose its privileged seigniorage position and with that the ability to achieve permanently higher returns on foreign assets than the returns paid to foreigners who invest in the USA. The global economy is already close to operating with three regional exchange rate anchors: the US dollar; the euro; and, increasingly, the renminbi. Hence, the transition to a tripolar system could occur sooner than many assert. Nevertheless, given the importance of financial deepening and integration in the internationalization of currencies, any shift will still be gradual.

Most studies of renminbi internationalization focus mainly on the supply side, by examining China’s own economic and political conditions related to it. This study in contrast addresses the demand-side of renminbi internationalization, by providing an indepth analysis of renminbi use in ordinary foreign economies from both economic and political perspectives, with a particular focus on South Korea, China’s next-door neighbor. It finds that sustainable indigenous market forces facilitating renminbi use in South Korea remain weak, despite the country’s close economic ties with China. This research also shows, however, that the Korean government has itself recently been able, through its policy measures, to generate new domestic vested interests supporting greater use of the renminbi. These findings ultimately highlight the significant impact on the internationalization of a currency of the politics in the foreign countries using it., JEL Classification Codes: E42, F02, F33, F50, Embargo Period 24 months, http://www.grips.ac.jp/list/jp/facultyinfo/chey_hyoung-kyu/

China's surplus in processing trade remains large. Processed exports are final goods produced using parts and components that are imported duty free. Since much of the value added of these exports comes from East Asia, exchange rates throughout the region should affect their foreign currency prices. This paper presents data on value-added exchange rates for processed exports over the 1993-2013 period and reports that they significantly affect exports. While the renminbi (RMB) appreciated by 36% between the beginning of 2005 and the end of 2013, exchange rates in supply chain countries have depreciated. This has mitigated the effect of the RMB appreciation on the price competitiveness of processed exports.

This paper argues that the twin surpluses in China's balance of payments will disappear in the future as a result of external and internal structural changes. China's current account surplus will diminish as a result of the decline in the goods trade surplus, the expanding service trade deficit and negative investment income. China's capital account might shift from surplus to deficit as a result of shrinking net direct investment inflows and more volatile short-term capital flows. When the twin surpluses no longer exist, the normalization of the US treasury bond yields will be sped up, terminating the one-way appreciation of the RMB exchange rate; the People's Bank of China's pressure to sterilize inflows will be alleviated, and new problems for the People's Bank of China's monetary operation will emerge; new financial vulnerabilities for the Chinese economy will arise. Finally, the present paper provides some policy suggestions for the Chinese Government to deal with the declining twin surpluses.

The paper considers the optimal transition path for China’s exchange rate regime. How can China successfully make the shift from the current dollar peg regime to a more desirable regime, whether a basket peg or a floating regime? To answer this question, we develop a dynamic small open economy general equilibrium model. We construct four transition policies based on a basket peg or a floating regime and compare the welfare gains of these policies relative to maintaining the dollar peg regime. Two main results are derived from the quantitative analysis using Chinese data from 1999Q1 to 2010Q4. First, following a gradual adjustment to a basket peg regime is the most appropriate path for China to take, with minimal welfare losses associated with the shift in the exchange rate regime. Second, a sudden shift to the basket peg is the second best solution, and is superior to a sudden shift to floating because the monetary authority can efficiently determine optimal weights to attach to currencies in the basket to achieve policy goals once they adopt a basket peg regime.

Instability in the world dollar standard, as most recently manifested in the US Federal Reserve's near-zero interest rate policy, has caused consternation in emerging markets with naturally higher interest rates. China has been provoked into speeding RMB “internationalization”; that is, opening up domestic financial markets to reduce its dependence on the US dollar for invoicing trade and making international payments. However, despite rapid percentage growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls (reinforced by financial repression in domestic interest rates) to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating (appreciating) exchange rate could attract even more hot money inflows, the People's Bank of China should focus on keeping the yuan/dollar rate stable so as to encourage naturally high wage increases to help balance China's international competitiveness. However, further internationalization of the RMB, as with the proposed Shanghai pilot free trade zone, is best deferred until world interest rates rise to more normal levels.

This paper examines how the China-bound exports of Japan and Korea are related to exchange rates, motivated by the fact that processing trade makes up a large proportion of China's trade, and that Japan and Korea are the leading source countries for processing imports. Because processing imports are inputs for exports, the link between such imports and China's exchange rates are ambiguous. We estimate export functions that include China's RMB real effective exchange rates (REER) along with bilateral real exchange rates (BRER) using Johansen's cointegration method and find that the RMB REER significantly affects Japanese and Korean exports to China, even more so than BRER in most cases examined. These two exchange rates appear in the export equations with opposite signs. Subsequently, we use the estimated model to illustrate the importance of accounting for a concurrent change in BRER when analyzing the effects of a hypothetical RMB revaluation on China's trade balances despite the apparently weak imports–BRER linkage.

The major objectives of China's macroeconomic policy are to stabilize economic growth and inflation, which, in turn, are important factors determining key prices, such as the policy interest rate, the renminbi exchange rate and stock prices. In a framework that distinguishes different phases of the business cycle based on whether the current period's economic growth rate and inflation rate are above or below their “normal” values, this paper analyzes the interaction among macroeconomic policy, economic growth and inflation in China since the Lehman crisis, and the implications for these key prices. The path of China's economy indicates that stimulus measures taken by the government during the recession phase and tightening measures implemented during the overheating phase have helped minimize the fluctuation over the business cycle. Our analysis shows that Chinese authorities tend to rely more on adjusting the exchange rate than the interest rate to stabilize the economy. Comparing with conditions at the time of the post-Lehman recession, the current slow pace of economic growth in China may reflect not only weakening demand, but also a lower potential growth rate associated with the arrival of the Lewis turning point.

When measuring the nominal effective exchange rate (NEER), three factors should be considered: direct import competition, direct export competition and third market competition. The traditional NEER methodology using aggregated export trade data underestimates the competition between countries producing homogeneous goods, so that the weight of the effective exchange rates is too reliant on trade scale. Based on 2002 6-digit items of the Harmonized Commodity Description and Coding System, this paper employs the competitive stress index to adjust the weighting system of the renminbi NEER for third market competition. In the new weighting system, European countries and some emerging economies have higher weights compared with some of the developed countries, including the USA, Japan and resources-dominated economies. This research will facilitate the understanding of changes in China's export competitiveness.

This paper discusses China's relatively new structure of dual onshore and offshore RMB markets. Its distinguishing feature is both offshore trading at exchange rates that are market determined and onshore trading at exchange rates anchored at the official spot rate with capital account inconvertibility. We note that thus far the CNH and CNY spot rates have largely tracked each other, suggesting that the shadow price on the convertibility constraint onshore and also the offshore diversification benefit is close to zero. However, this could change in the future. We discuss the potential for the offshore RMB market to grow with trade settlement and bilateral swap arrangements in RMB, which would provide a big enough pool of liquidity for the RMB to become a vehicle currency and reserve currency. These potential developments will be restrained by onshore inconvertibility, but moving to convertibility seemingly implies major change in China's financial structure and the offshore RMB arrangements are only a small first step along this path. Crucial in this evolution of arrangements will be future Chinese growth performance and the relative attractiveness of onshore inconvertible but offshore marketable RMB relative to the debt laden and slow growth currencies of the USA, the EU and Japan.

The appearance of new product varieties and improvements in the quality of goods have both played key roles in the rapid growth of China's exports. However, these two important elements have not been formally integrated into the demand equations for China's exports. As we demonstrate in this paper, income elasticity will be underestimated if new varieties of goods and quality improvements are omitted in price index and quantity index calculations, which are necessary for estimating the export demand function. Moreover, the faster new product varieties enter export markets, the greater the underestimation will be. In this paper, we develop an export demand equation that takes into account new product varieties and improvements in quality, and then calculate the demand function for China's exports using the data from 1992 to 2006. According to our estimation, the short-term income elasticity of demand for China's exports is approximately 2.34, and the short-term price elasticity is approximately –0.65. Our estimation predicts an increase in China's export value in the case of an RMB appreciation or export rebate rates reduction in the short term, due to the low price elasticity of China's exports, whose absolute value is less than 1. Our findings are novel and could have significant policy implications.

Using principal component analyses, this paper constructs two internationalization indices for the renminbi (RMB) and 32 other major currencies. We find that the RMB's currency internationalization degree index (CIDI) is still low, and far behind the 4 most important international currencies. In 2009, it was ranked 18th among all important international currencies. However, in terms of the currency internationalization prospect index (CIPI), the RMB has remained the world's fifth highest since 2006. Although it is still far behind the US dollar and the euro, surpassing the ranking of the yen and the pound is possible in the near future. The dramatic difference in the ranking between the CIDI and the CIPI is a result of China's tight capital account control, the usage continuity of international currency due to network externalities, and the narrow foreign exchange and imperfect financial markets. Hence, to a large degree, the RMB's potential as an international currency depends on China's capital account liberalization.

This paper discusses the role of Hong Kong in China's grand scheme to build up the RMB as a global reserve currency. We highlight the economic importance of Hong Kong to China in terms of channeling foreign direct investment into China, some of which, in the future, will be denominated in the RMB. We discuss the development of China's RMB currency swap and deposit markets in Hong Kong. These offshore markets enable the RMB to trade freely, setting the stage for the RMB to become fully convertible and allowing market forces to play a role in pricing the value of the RMB, and help in the development of the RMB-denominated bond (or dim sum bond) market in Hong Kong. Finally, we present evidence of the phenomenal growth of the dim sum bond market in Hong Kong, which can further enhance and strengthen the use of the RMB outside China.

The present paper investigates the effect of China's share of US imports on the aggregate-level exchange rate pass-through to US import prices over the period from January 1999 to December 2008. The paper also focuses on the post-reform period, after 2005, allowing greater flexibility of the RMB to explore the change in the role of the Chinese import share in determining the trend in the US exchange rate pass-through. Evidence reveals that China's share of US imports has a negative effect on the exchange rate pass-through. However, this negative effect has been moderated to a negligible level since China's exchange rate reform. An important implication is that the exchange rate flexibility of the RMB has been raised to a significant level may no longer cause distortion in the US competitive environment and prevent the USA from adjusting current accounts.

Since the recent economic crisis, the undervaluation of China's exchange rate has been a focus in the debate on the global policy mix. Using a non-competitive input–output table, we establish a comparative-static general equilibrium model to simulate the impact of real exchange rate changes on Sino–US trade and labor markets. The simulation shows that the impacts of a 10-percent RMB revaluation on the trade surplus of China and the labor market of the USA are more modest than is generally perceived, and the negative impact on the output of the non-processing industry in China is more significant than that on the processing industry. The Sino–US trade imbalance will continue to deteriorate, China's non-processing trade surplus will decline and the processing trade will increase, with the combined effect being small. For the USA, labor-intensive goods imported from China will shift to different Asian countries instead of transferring back to the US market. The simulation results indicate that the impacts of an RMB revaluation on both Chinese and US labor markets would be limited.

The paper assesses the international status of the Chinese currency renminbi (RMB) by recounting and reviewing the recent polices China instituted to promote the use of the RMB in the global market. The evidence suggests that the RMB is gaining acceptance overseas. However, compared with the size of the Chinese economy, the current scale of the use of the RMB is quite small. The path to a fully fledged international RMB will be a distant goal.

In the present paper, we estimate the de facto RMB exchange rate regime, the currency basket, the floating band and the foreign exchange market pressure before and after the reform of the Chinese exchange rate regime in 2005. We find the following stylized facts: the value of the RMB became stable after the reform; the weight of the US dollar remained high in the basket, while other currencies remained statistically significant; and the floating band gradually increased to 10 percent during 2005–2008, and then greatly narrowed from the late summer of 2008 under the assumption of a yearly resetting interval. We find that the foreign exchange market pressure increased from 2005 to 2008. A possible reason is that the weight of the US dollar in the basket was slightly lower than the share of the US dollar in total transactions on the Chinese foreign exchange market. Therefore, it is reasonable for China to adopt a dollar peg exchange rate regime.

This paper is a tentative endeavor to delineate the potential of the renminbi to become a global currency. It first analyzes the critical economic, financial and policy attributes that are required to support a currency to gain an international role. It then examines whether China has the potential to acquire these attributes. The paper concludes by offering some provisional observations on the implications for Asia and the global economy, should the renminbi evolve into a world currency in the coming decades.

The Chinese Government has stepped up its drive to reconstruct its international financial strategy after the sub-prime crisis developed into a global financial crisis in 2008. The main aim of the strategy is to reduce the country’s dependence on the US dollar in foreign trade, cross-border capital flows and foreign exchange reserve management. The strategy can be divided into three tiers: renminbi internationalization, regional monetary cooperation and reconstruction of the international monetary regime. So far, the Chinese Government has fared well in the application of all three tiers. We hold that the Chinese Government should continue in the same direction in a coordinated manner despite various challenges it faces.

Since China introduced a new managed floating exchange rate regime in 2005, the persistent appreciation of the renminbi against the US dollar has led Chinese firms to reassess their choice of invoice currency among the dollar and other international alternatives to price their exports. The present paper performs a systematic invoice currency analysis by surveying the published literature, summarizing criteria for decision-making, and evaluating the choices available to Chinese exporters implementing currency invoicing strategies to maximize expected profits. This study finds that the euro could play an increasing role as the invoice currency of Chinese firms, although the US dollar will still play a dominant role. Chinese exporters might shift gradually from the dollar to the euro in the face of the falling dollar, balancing between the two by necessity.

The present paper uses the model-dependent and the model-independent approach to measure the RMB exchange market pressure (EMP) and the central bank's intervention using monthly data from January 1999 to June 2008. It is determined that the RMB has been under great appreciation pressure over the past decade. However, the pressure has been weakening since 2005. The two approaches provide significantly different results in terms of the estimated RMB EMP indices and the estimated central bank's interventions. The differences may lead to different predictions of potential currency crises. According to the estimation of the RMB EMP, and based on the model-independent approach, the paper shows that China has been under threat of an appreciation currency crisis since 2008. Therefore, China should adopt a more flexible exchange rate regime to prevent a potential crisis.

In July 2005, the Chinese Government unpegged the RMB from the US dollar. As the RMB has followed a remarkably predictable appreciation over time, I examine the price of Chinese exports to the USA after unpegging the exchange rate. Results suggest that the Chinese industries with greater import market share were able to raise their prices after the removal of the pegged exchange rate regime; however, over time there is a significant deflationary trend. Chinese export prices tended to decrease under an unanticipated RMB appreciation; this effect was more pronounced for industries with more pricing flexibility. This suggests that Chinese exporters are consistently “pricing to market” and thus creating a significant foreign exchange policy implication. Specifically, a more flexible exchange rate regime will likely have little impact on the prices of Chinese exports to the USA but might increase the profit volatility of Chinese firms.

During the second half of 2007 and early part of 2008 when there were intense inflationary pressures in China, RMB appreciation was advocated as a means of helping to curb inflation. The effectiveness of appreciation in controlling inflation depends on the impact of exchange rate movements on import and domestic prices. Our analysis finds fairly large and speedy exchange rate pass-through (ERPT) to import prices: 50 and 60 percent for the short run and long run, respectively. However, the degree of ERPT decreases along the price chain from upstream to downstream prices. ERPT for consumer prices, the most downstream prices, is much milder and has substantial lags. A 10-percent rise in the nominal effective exchange rate will dampen consumer prices by 1.1 percent within a year, with very little pass-through in the first half year, and by 2.0 percent over the long run. These findings, particularly the ERPT to consumer prices, suggest that RMB appreciation can help to reduce inflationary pressures over the longer term. However, it is unlikely to provide rapid relief to the current round of high inflation because of the long lags in ERPT. The RMB needs to strengthen in effective terms to exert the desired dampening impact on prices.

China's financial conundrum arises from two sources. First, its large saving (trade) surplus results in a currency mismatch because it is an immature creditor that cannot lend in its own currency. Instead, foreign currency claims (largely US dollars) build up within domestic financial institutions. Second, economists, both American and Chinese, mistakenly attribute the surpluses to an undervalued RMB. To placate the USA, the result was a gradual and predictable appreciation of the RMB against the dollar of 6 percent or more per year from July 2005 to July 2008. Together with the fall in US interest rates since mid-2007, this oneway bet in the foreign exchanges markets not only attracted hot money inflows but inhibited private capital outflows from financing China's huge trade surplus. Therefore, the People's Bank of China had to intervene heavily to prevent the RMB from ratcheting upwards, and so became the country's sole international financial intermediary as official exchange reserves exploded. Because of the currency mismatch, floating the RMB is neither feasible nor desirable, and a higher RMB would not reduce China's trade surplus. Instead, monetary control and normal private-sector finance for the trade surplus require a return to a credibly fixed nominal RMB/USD rate similar to that which existed between 1995 and 2004. However, for any newly reset RMB/USD rate to be credible as a monetary anchor, foreign “China bashing” to get the RMB up must end. Then the stage would be set for fiscal expansion to both stimulate the economy and reduce its trade surplus.

The present paper uses a two-step approach to estimate the pass-through effects of changes in international commodity prices and the RMB exchange rate on domestic consumer price inflation in China. We first estimate the pass-through effects of international commodity prices on producer prices and then estimate the pass-through effects of producer price inflation on consumer price inflation. We find that a 10-percent increase in international commodity prices would lead to China's producer prices increasing by 1.2 percent 3 months later, which in turn would increase China's domestic inflation by 0.24 percent over the same period. However, a 10-percent appreciation of the RMB exchange rate against the US dollar would help to reduce increases in producer prices by 4.4 percent over the following 3 months, which in turn would lead to a 0.89-percent decline in consumer price inflation over the same period. Our findings suggest that appreciation of the RMB in an environment of rising global commodity prices and a weak US dollar could be an effective instrument to help contain inflation in China.