Rmb Exchange Rate And China's Exchange Rate Policy

The Reform of Exchange Rate System for Renminbi has long been a hot topic among economists. During the past several years, China has successfully enlarged its export volume and made great surplus. By the end of 2005, China' s foreign exchange reserves has reached USD818.87 billion, surpassing Japan to be No. 1 reserve keeper in the world. On the contrary, Japan is now facing severe economic recession and United States has suffered greater trade deficit on current account. Pressures from Japan and U.S. have been the major force for China' s foreign exchange reform. Chinese government claims that its great trade surplus is not benefited from unfair foreign exchange policy but the comparative advantage of cheaper labor rate. China will reform the formulation of its exchange rate system in accordance with its economic development, exchange risk management ability of enterprises and financial institutions, and its balance of payments condition.The exchange rate is the price of one currency for another one. Theoretically, the exchange level should be in consistent with its par value. For paper money, different purchase power makes different exchange rate. At the same time, the supply and demand of one currency also have great effects on its exchange rate. Exchange rate of one currency could influence local economy. So some countries pursue favorable exchange policies to support economic development. The two main streams of exchange system are fixed exchange rate system and floating exchange system.Since 1949, Renminbi has changed from fixed rate system to managed floating rate system, from being determined by government authorities to market determination. On July 21st 2005, the People' s Bank of China (PBC) announced a sudden appreciation of Renminbi(USD1=RMB8. 11) and adopted a managed floating exchange rate system based on market demand and supply. Since then, PBC has intervened foreign exchange market according to the international and domestic economic conditions, with reference to a basket of foreign currencies, in order to maintain the...