Three months later, RMB exchange rate returns to the 6-beginning range against dollar. For quite a long time, whether RMB goes beyond or maintain the 7-per-dollar level sparks controversy in China's market. 

The history will help us to understand the RMB exchange rate. It has been 25 years since the earliest RMB exchange rate reforms, starting from the early 1994 marked by the unified and managed floating exchange rate. In the latest one, the "811" exchange rate reform in 2015, the RMB exchange rate became more flexible, but the marketization degree, transparency and pricing range of the price formation mechanism had yet to be improved to form a "clean floating" RMB. 

The vision is to set up a floating RMB exchange rate, but how should we achieve that? The answer lies in a new book, Towards a Clean Floating Renminbi, by Miao Yanliang, an adjunct professor of National School of Development at Peking University and chief economist of the Central Foreign Exchange Business Center of the SAFE. The book's preface is written by Yu Yongding, member of Academic Divisions of the Chinese Academy of Social Sciences, Zhu Min, president of the National Institute of Financial Research, Tsinghua University, and Lu Lei, deputy director general of the SAFE; and it is jointly recommended by Liao Min, deputy director of the Office of the Finance and Economics Committee of the Central Government and vice minister of the Ministry of Finance, Bai Chong'en, president of Tsinghua University School of Economics and Management, Huang Yiping, professor and vice president of National School of Development at Peking University, Huang Haizhou, member of the Management Committee of CICC and vice president of the China Society of World Economics, and Gao Shanwen, academic member of CF40. 

Through a systematical review on the commonness and individuality of the transformation of China's exchange rate system, an analytical framework is set up in this book for further increasing the flexibility of RMB exchange rate based on "reasons, timing and way of the exchange rate reform", and a comprehensive roadmap is designed for gradual reform. Finally, from the perspective of the forming mechanism of RMB exchange rate expectation, this book, by summarizing the experience of exchange rate reform, puts forward that the best way to avoid divergence of exchange rate expectation is to uphold the withdrawal from normalized intervention. 

About the author 

Miao Yanliang, a Ph.D. from Princeton University, member of CF40, and adjunct professor of National School of Development at Peking University, was an economist at the IMF from 2008 to 2013 and once engaged in the rescue effort of European debt crisis. He has worked in the SAFE since 2013, successively serving as a senior adviser to the director general of the SAFE, research director and chief economist of the Central Foreign Exchange Business Center. His researches focus on global macro-strategy and monetary policy, international financial markets and so on. Having published numerous policy reports and academic papers in both English and Chinese, he won the title of "Young Global Leader" of the 2016 World Economic Forum in Davos. 

Brief introduction 

This book is a research result of the project, "Towards a Clean Floating Renminbi" approved by CF40. The exchange rate is essential to the financial system arrangement of a country. After the "811" exchange rate reform in 2015, the RMB exchange rate became more flexible, but the marketization degree, transparency and pricing range of the price formation mechanism had yet to be improved to form a "clean floating" RMB. Through a systematical review on the commonness and individuality of the transformation of China's exchange rate system, an analytical framework is set up in this book, Towards a Clean Floating Renminbi, for further increasing the flexibility of RMB exchange rate based on "reasons, time and way of the exchange rate reform", and a comprehensive roadmap is designed for gradual reform. Finally, from the perspective of the forming mechanism of RMB exchange rate expectation, this book, by summarizing the experience of exchange rate reform, puts forward that the best way to avoid divergence of exchange rate expectation is to uphold the withdrawal from normalized intervention. 

Recommendations 

China's economic transition is underway, as evidenced by the accelerating development of a more open economy. It is necessary to reform and improve the exchange rate formation mechanism, which in a sense, is also one of the most challenging issues in the financial field. The exchange rate seems a price relationship between different currencies. But in view of international capital flows and domestic macroeconomic equilibrium, its determination and system become mysterious. Only time will tell whether a country's exchange rate system conforms to the demands of the real market or to our level of understanding. Dr. Miao Yanliang, with his excellent theoretical accomplishment and unique practical experience at home and abroad, provides us with a useful interpretation historically. There is good reason to believe that the book presents unique insights of concern in this area. 

by Liao Min, deputy director of the Office of the Finance and Economics Committee of the Central Government and vice minister of the Ministry of Finance 

Of all our pricing mechanism reforms, that of the exchange rate formation mechanism may be the one with the highest complexity, the greatest uncertainty in consequences, the lowest controllability, and therefore the least consensus from economists. Given China's special background and considerations in this regard, we cannot simply draw on experience from other countries or rely on the conclusions of the existing literature: for China, a large developing country in a turbulent and volatile environment internationally, the financial system is imperfect and continuous reform is needed in other complicated zones and challenging work domestically, all of which call for special countermeasures for currency internationalization, foreign exchange reserves and risk prevention and control. This asks for our in-depth research on the RMB exchange rate formation mechanism, including the goal, the roadmap leading to the goal, and the timing and pace of progressing according to the roadmap. On the basis of profound academic knowledge, practical experience in the management of China's exchange rate and foreign exchange reserves and insights into the practical reality and policy tendency, Dr. Miao delves into the exchange rate formation mechanism and related issues, and has answered many key questions, which are conducive to the creation of the book. This book, as I believe, is a must-read for anyone who is concerned about the reform of the RMB exchange rate formation mechanism. 

By Bai Chong'en, professor and dean of Tsinghua University School of Economics and Management 

The RMB exchange rate system is an important policy clue throughout the four decades of China's economic reform. Policies on RMB exchange rate has undergone many reforms and adjustments, from the obviously overvalued fixed one at the beginning of the reform to the unified and managed floating one in early 1994, and from the fixed one pegged to the USD during the Asian financial crisis in 1997 to the managed floating one referenced to a basket of currencies in 2005. With rapid development of China's economy, especially its increasing openness, we must strive to reform the RMB exchange rate reform since the last leg of a journey marks the halfway point. Professor Miao Yanliang's new work, a rare good book with both theoretical analysis and policy suggestions, provides a thinking framework and a detailed roadmap for building a clean floating China's exchange rate. 

By Huang Yiping, professor and vice dean of National School of Development at Peking University 

The past century or so has witnessed diversified changes of global currency exchange rate system, from a fixed exchange rate with free capital flow (gold standard), to a fixed exchange rate with restricted capital flow (Bretton Woods system), to a floating exchange rate with free capital flow (post-Bretton Woods system). As a country's financial system arrangement, exchange rate system is of great importance and high complexity. With his profound theoretical foundation and rich policy and practical experience, Dr. Miao Yanliang has made a deep and insightful analysis of the RMB exchange rate, and offered clear and far-sighted advices for the further reform of the RMB exchange rate system, which are worthy of learning and reference by all those who pay close attention to the RMB exchange rate. 

By Huang Haizhou, member of the Management Committee of CICC and vice president of the China Society of World Economics 

Since a slight move in the RMB exchange rate reform may affect the situation as a whole, it has always been closely watched by the financial markets; there are intractable and miscellaneous factors influencing the exchange rate; selecting and determining the exchange rate formation mechanism has always been a complicated process, with interlaced advantages and disadvantages and many concessions to the reality. There are different views and numerous talks, yet few masters in terms of experience and lessons and analytical ideas in the course of setting up a clean floating RMB exchange rate. Due to high theoretical attainments, impressive work experience, as well as unusual persistence and obsession with economics, Dr. Miao Yanliang has made unique and refreshing analysis and insights. His thoughts on exchange rate are comprehensive and detailed, many of which are in line with the traditional classical theory as well as the times. The book is an essential reference for readers interested in the RMB exchange rate. 

By Gao Shanwen, academic member of CF40 

Contents 

Chapter I Overview 

I. Reasons for Exchange Rate Reform 

II. Timing for Exchange Rate Reform 

III. Way towards a Clean Floating RMB 

Chapter II Status Quo and Vision of RMB Exchange Rate System 

I. What Is a Clean Floating Exchange Rate System?  

II. Why Is a Clean Floating RMB Necessary?  

III. Evolution of RMB Exchange Rate System 

IV. How Long Is the Journey from the Current Exchange Rate Arrangement to a Clean Floating One?  

V. Conclusion 

Bibliography 

Chapter III Decisions on Foreign Exchange Reserves, Global Liquidity and Exchange Rate 

I. Preface and Literature Review 

II. General Equilibrium Model of Decisions on Exchange Rate Including Foreign Exchange Reserves 

III. Empirical Design on the Function of "Double-edged Sword" of Foreign Exchange Reserves 

IV. Empirical Results and Analysis 

V. Conclusions and Discussion: Give More Play to the Clearing Role of Exchange Rate 

Bibliography 

Chapter IV Understand the Rise and Fall of Foreign Exchange Reserves- The Triadic Determinism of Foreign Exchange Reserves 

I. Preface 

II. Rise of Foreign Exchange Reserves 

III. Positive Feedback Mechanism of "Overshooting" of Foreign Exchange Reserves 

IV. Fall of Foreign Exchange Reserves 

V. Policy Suggestion 

Bibliography 

Chapter V Interest Margin, USD Index and Cross-Border Capital Flows 

I. Preface 

II. Theoretical Relationship between Interest Margin, Exchange Rate and Capital Flows 

III. Empirical Relationship between Interest Margin and Capital Flows 

IV. USD Trend, RMB Exchange Rate and Capital Flows 

V. Sino-US Differentiation and USD Trend 

VI. Exchange Rate Flexibility and USD Comfort Zone 

VII. Conclusion 

Bibliography 

Chapter VI Macro Conditions for RMB Exchange Rate Fluctuation 

I. Macro Conditions for Exchange Rate Fluctuation 

II. Quantitative Analysis of Macro Conditions 

III. Is China Possible for Further Advancing the Exchange Rate Reform Macroscopically?  

Bibliography 

Chapter VII Roadmap to Achieve a Clean Floating RMB 

I. Preface 

II. Expand the Reform Roadmap in the Impossible Triangular Framework 

III. International Experience of Exchange Rate Reform 

IV. How to Increase the Flexibility of RMB Exchange Rate Step by Step?  

V. Supporting Conditions for Coordinated Promotion of Exchange Rate Reform 

VI. Conclusion 

Bibliography 

Chapter VIII From Divergence to Convergence: Study on the Forming Mechanism of RMB Exchange Rate Expectation 

I. Preface 

II. Literature Review of Forming Mechanism of Exchange Rate Expectation 

III. "811" Exchange Rate Reform and the Change of RMB Exchange Rate Expectation 

IV. Conclusion and Policy Suggestion 

Appendix 

Bibliography 

Chapter IX Devaluation Pressure and Expectation- and RMB Is Robust Enough to Tackle the 7-beginning Rate 

I. Devaluation Pressure and Expectation 

II. The Great Devaluation Pressure yet Low Expectation of RMB in 2018. 

III. Deviations between Devaluation Pressure and Expectation Will Not Last Long 

IV. Conditions for Divergence of RMB's Expectation 

V. Overall Controllable Risk of Worsening Devaluation Expectation Due to RMB Breakthroughs of Key Points 

VI. Continue to Improve the Flexibility of the RMB Exchange Rate 

Bibliography 

Chapter X Fundamentals, Emotion and RMB Exchange Rate 

I. Determinants of Exchange Rate 

II. The Reaction of Exchange Rate to Fundamentals 

III. Understand Marginal Changes in China's Current Account 

IV. Changes in China's Current Account in the Light of International Experience 

V. RMB Exchange Rate and Foreign Exchange Reserves under the New Pattern of Wider Opening-up 

Bibliography 

Chapter XI Summary: How Is a Clean Floating RMB Exchange Rate Achieved?  

Appendix I Fear for Floating Exchange Rate, Overshooting and Fright: Can the Exchange Rate System Realize Smooth Transition?  

Appendix II RMB Exchange Rate Mechanism and Expectation 

Postscript 

Source | CF40