Purpose – This report examines the recent developments and trends relating to the Chinese government’s
policy actions and the key issues that determine the choice of exchange rate regime in China. An up-to-date
“stock-take” of the economic indicators is conducted to determine what is suitable for China in light of the
rapidly evolving nature of the world economy and trading environment. This paper discusses the role of
economic development, trade competitiveness, capital flow, foreign exchange reserve, and RMB
internationalization in the determination of the RMB exchange rate regime.
Design/methodology/approach – This research uses an inductive approach to gain a fine-grained
understanding of the complex, multifaceted aspects of China’s exchange rate policy. A combination of
statistical analysis, including basic descriptive statistics, trend analysis, and a correlation study are used
to explore the association between various indicators and their implications. The report also draws on
analysis of a broad range of data sources and the work of numerous researchers and research
institutions.
Findings – A more flexible exchange rate regime can play a complementary role towards rebalancing the
Chinese economy by raising the buying capacity of families, rebalancing growth towards domestic
consumption, and reducing reliance on export. China’s price elasticity of the demand for exports was
relatively low that the appreciation of the Chinese currency has almost no influence on optimizing China’s
trade balance. A more flexible two-way flow in RMB would be suitable under the current cash flow scenario in
China. Reduced intervention will facilitate further adjustment in reserves. Lastly, in the early stage of RMB
internationalization, flexibility in the exchange rate is one of the factors that influences its growth prospect as
a reserve currency.
Research limitations/implications – The findings and conclusion are derived based on the latest
empirical information, statistical evidence, and economic theory. This inquiry does not build on a theory, and
aims to neither verify a theory, nor test hypotheses. Rather, it aims to demonstrate, assess, and explain
significant roles that various economic factors play in shaping the future exchange rate regime of China.
Originality/value – This paper presents the rationale behind a more flexible two-way exchange rate, by
assessing the latest empirical data and theoretical explanation that support such a move.
Keywords Foreign exchange, Financial markets and the macroeconom
