The Study On The Exchange Rate Regime Selection For RMB

During the recent ten years, RMB exchange rate and RMB exchange rate regime have been popular topics both in China and in foreign countries, and how to choose and perfect RMB exchange rate regime are quite important issues for China. On 21st, June,2005, the People's bank of China announced that RMB exchange rate regime, which will be based on supply and demand on the financial market, will be managed flexible exchange rate regime, referring to a basket of foreign currencies. From then on, RMB exchange rate will no longer peg on US dollar, instead, it will become more flexible. Recently, except for the pressure of the appreciation of RMB exchange rate, China has been faced a series of economic problems, such as the sharp increase of foreign exchange reserve, the constantly inflow of international hot money, as well as the double surplus of current account and capital account, all of which are closely related to the RMB exchange rate regime. Otherwise, since China has joined in WTO, China's economy has become more open. The government of China has made the goals of financial industry to make capital floating more free, to make best use of resources, to make RMB freely exchanged, and to open the capital and financial account. So this paper will discuss that what kind of RMB exchange rate regime can solve those economic problems and better accelerate the development of China's economy.The author will choose four different aspects, which are historical experience, internal equilibrium and external equilibrium, policy-effect, and capital market, using theories of internal and external equilibrium, Mundell-Fleming Model, Theory of Ternary Paradox, and Theory of Interest-rate Parity as analytic tools, to try to get the conclusion of RMB exchange rate regime should be a flexible exchange rate regime. Based on the conclusion, the author also brings up some policy suggestions.