On The Choice Of China's Exchange Regime

The choice of foreign exchange regimes has been paid much more emphasis since continuous currency crisis in 1990's. That is a complicated topic because of the significant and comprehensive role that exchange rate plays in economic performance. This thesis provides a systematic analysis on China's choice of exchange regimes.China's exchange regimes, like other policies in China, has been kept changing with the course of economic openness. A brief overview on China's exchange regimes reform shows RMB has been indeed pegged on US dollar, no matter what kind of policy the authority claims that it adopt. This partiality of policy authority leads to the problem of path dependency in further policy reform.The present RMB exchange regime contributes a lot in economic growth and stability, especially during the currency crisis in Asia. But the costs are pretty high, and with the deepening of Chinese finance section, the costs would go much higher. The exchange regimes of RMB should be re-chosen for the inner defect of present one.With capital flow, the choice of exchange regimes is a tradeoff between stability and flexibility. The key point is the sustainability and capacity against crisis. As conditions keep changing, different targets should be take in different period. In long run, the best policy is free floating, while in short run, the target zone is better.