Cai Linge

Abstract： The selection of RMB exchange rate regime is now and will be one of the most important issue for China to carry out economic policies. A proper exchange rate system selection is the key to the continuous development of China. How to catch and utilize the opportunity to improve and deepen the system reform of exchange rate has already became an urgent problem in economic life. China need to improve the system of managed floating foreign currency exchange rates and keep the RMB exchange rate basically stable at an appropriate and balanced level.

Key words：exchange rate regime； Chinese Renminbi； appreciation

1.Introduction

In recent years， domestic and international society had a fierce debate on the issue of RMB exchange rate. At the same time， the problem of capital account convertibility has also been a hot spot in domestic. There are a lot of scholars believe that the exchange rate regime which lack of flexible will affect the efficiency of macro economic policies. This article comprehensively analyzed China's choice of its exchange rate system both in theory and in fact. It concluded that China's exchange rate regime reform will finally realize the transition from peg to independent floating. But this article failed to set up mathematical model.

2.The evolvement of RMB exchange rate regime

Review the evolvement of RMB exchange rate regime since reform and opening up， it can be summarized as the following three stages： （1） Converting from crawling pegging system to the managed floating system in 1979-1994； （2） Transforming from managed floating system to substantial dollar-pegged exchange rate policy in 1994-2005； （3） Implementing managed floating system since 2005. Throughout the course of China's reform of the RMB exchange rate regime， China's exchange rate regime reform has made some achievements， it made China smoothly through the Asian financial crisis and the international financial crisis. However， it still need a long time to make RMB freely convertible and implement free-floating exchange rate.

3.The disadvantages of the two types of exchange rate system

3.1 the disadvantages of pegged exchange rate system

In the past， financial crisis occurred frequently in developing countries， it shows that the pegged exchange rate regime will result in some problems. First， the pegged exchange rate system will weaken government macro-control ability. Second， it will result in overvaluing exchange rate. Third， it increases the pressure of short-term foreign debt in developing countries. Forth， it can lead to short-term capital flight， cause financial panic， and even trigger a currency crisis. To sum up， It will have negative impact on financial stability and economic development in developing countries， and even affect political stability and national security.

3.2 the disadvantages of floating exchange rate regime

Elasticity of export supply is insufficient and the price elasticity of import demand is low in developing countries. However， the stability of the floating exchange rate depends on supply and demand of import and export products. If international trade lack of flexibility， it can only correct the balance of payments deficit when there is a great enough exchange rate movements. Floating exchange rates has intrinsic tendency of inflation. The exchange rate is not stable when the countries implement floating exchange rate system even in the developed countries. Besides， under the floating exchange rate system， a country can maintain the independence of monetary policy if its central bank does not intervene in currency markets or eliminate the currency substitution， but it only exists under the premise that residents just hold their domestic currency.

4. The choice of exchange rate regime

China， since its creation in 1949， gradually adjust the RMB exchange rate， open current accounts and capital accounts under the fixed exchange rate system. The main reason why China chose this exchange rate system lies in two aspects. On the one hand， owing to the long-term planned economy before the reform， the domestic market mechanism is incomplete and exchange rate determination system is not mature. On the other hand， a managed floating exchange rate system can effectively isolate the domestic market and international market， and guarantee the stability of the domestic economic. To choose reasonable exchange rate system in China， we should give full consideration to the international and domestic economic situation， combined with China's specific policy goal and the direction of the exchange rate regime choice.

5. Conclusion

It is difficult for China， a developing country， to choose its own exchange rate regime. The root of the dilemma is the inequality of the international financial system. The goal of RMB exchange rate system reform should highlight its own characteristics and make the currency more independent. Greater exchange rate flexibility in the exchange rate system requires gradual increase in the weights attached to other currencies， as well as broadening of the floating bands of other currencies in the basket. With more and more pressure on the RMB inflation， the question about currency exchange regime choice of China became an academe focus once again.

References ：

[1]Sun， J. Retrospect of the Chinese Exchange Rate Regime after Reform： Stylized Facts during the Period from 2005 to 2010. China & World Economy， 2010.

[2]Tian， L.， & Chen， L. N. A reinvestigation of the new RMB exchange rate regime. China Economic Review， 2013.