China Research

History helps sometimes – even when it comes to the future; in this case when looking at exchange rate policy (FX policy) since a dozen of years ago. In 2005, exchange rate policy was changed a bit when the PBC announced that the RMB was to move into a cautiously managed floating system with initially very small daily fluctuation ranges.

These ranges were, however, gradually widened and reached in spring 2014 as much as +/- 2 percent; but since August 2015, temporary depreciation moves have been possible even outside the 2-percent band of the day. Technically, the PBC announces in the morning of every working day at 9.15 its “central parity rate” against other currencies (mainly the USD) for onshore trading, influenced by the rates from the closing session the day before and current market conditions. Furthermore, offshore trading takes place – uncontrolled – in Hong Kong, using so-called CNH/USD rates, normally but not always traded very close to onshore-USD/CNY rates

Also after the fluctuation-band reform in 2014 the PBC continued to benchmark a basket of currencies – but still without publishing the composition of the basket (which, however, obviously remained dominated by the U.S.dollar). Another major change forward was the innovative, daily publication of the weighted currency basket announced in December 2015. In 2017, the RMB basket was extended by another 11 currencies – now up to as much as 24 different currencies, meaning some decreasing influence of, for example, the American currency and monetary policy.

It may happen in the future that the RMB index is stable and the U.S. dollar at the same time moving within the index, reflecting the (somewhat) declining role of the American currency in the Chinese currency basket. New, trade-weighted shares will be prepared annually. But the exact, policy-driven fluctuation or intervention bands – if there are any – remain logically unknown. All in all, FX policy remains controlled, also day by day.

In 2017, the currency basket of the PBC (2014-12-31=100) – or rather of the Chinese Foreign Exchange Trade System (CFETS, a sub-entity of the People’s Bank of China) – looks as follows (the eight highest weights in percent):

Composition of the official Chinese currency basket (2017):

USD 22.40 (down from 26.40)

Euro 16.34 (down from 21.39)

JPY 11.53 (down from 14.68)

KRW 10.77 (n/a)

AUD 4.40 (down from 6.27)

HKD 4.28 (down from 6.55)

MYR 3.75 (down from 4.67)

GBP 3.16 (down from 3.86)

It seems to be the case that the PBC and other Chinese decision makers these days rather define “exchange rate stability” referring to the RMB index (or BIS index) than to the U.S.dollar alone. This may be disliked by certain American interests – but it should be up to China itself to decide on such a policy issue (which is normal in most other independent countries in such a context).

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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