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Managing the renminbi: should China peg to a trade-weighted basket?

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  • Heikki Oksanen

Abstract

type="main"> Pegging the renminbi (RMB) to the US dollar since 1994 has characterised China's exchange rate policy under a fixed peg or appreciating crawling peg. The current policy, announced in June 2010, of ‘floating with reference to a basket’ made the RMB 25 per cent stronger against a trade-weighted basket by early August 2015, while it was 10 per cent stronger against the US dollar. Thus, 14 percentage points arose from changes in the cross rates of the other currencies, notably from the fall of the euro since December 2014. Devaluation of the RMB by 3 per cent in August 2015 just covered the effective appreciation since December 2014. Effects of the cross rates of other currencies could be eliminated by managing the external value of the RMB with reference to a genuine trade-weighted basket. This could be a suitable intermediary exchange rate regime for China, as the risks associated with free floating are still great. Diversifying further the currency composition of the foreign exchange reserves and other foreign assets of the Chinese government, from US dollars towards euro and yen assets, would be a natural parallel shift. The euro–US dollar–yen exchange rates in late summer 2015 may offer a good opportunity to carry out this move.

Suggested Citation

  • Heikki Oksanen, 2015. "Managing the renminbi: should China peg to a trade-weighted basket?," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 29(2), pages 18-29, November.
    • Handle: RePEc:bla:apacel:v:29:y:2015:i:2:p:18-29
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    File URL: http://hdl.handle.net/10.1111/apel.12118
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    References listed on IDEAS

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    1. Heikki Oksanen, 2015. "Management of the External Value of the Renminbi," CESifo Working Paper Series 5325, CESifo.
    2. Heikki Oksanen, 2012. "Re-pegging the renminbi to a basket: issues and implications," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 26(1), pages 18-33, May.
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