What is a fixed peg? Let’s try to describe the history and current expression of the RMB exchange rate system.

After 1994, my country implemented a managed floating exchange rate system based on market supply and demand. However, the nominal exchange rate of the RMB against the US dollar has remained relatively stable except for a slight appreciation from January 1994 to August 1995. After the Asian financial crisis, the Chinese government further narrowed the floating range of the RMB exchange rate because the decoupling of the RMB from the US dollar may lead to an appreciation of the RMB, which is not conducive to export growth. In 1999, the IMF's classification of China's exchange rate system also changed from "managed floating" to "fixed peg to a single currency."

The RMB exchange rate formation mechanism before 1994. From the founding of New China to before the reform and opening up, under the traditional planned economic system, the RMB exchange rate was strictly managed and controlled by the state. According to the needs of economic development in different periods, my country's exchange rate system before reform and opening up went through the single floating exchange rate system in the early days of the founding of New China (1949-1952), the single fixed exchange rate system in the 1950s and 1960s (1953-1972), and the A single floating exchange rate system (1973-1980) calculated based on a "basket of currencies" after the Dayton Woods System.

The development history of the RMB exchange rate system

1. The early stage of transition to a market economy (1979-1993)

The first stage is the relationship between the internal settlement price of the RMB and the official The period of exchange rate coexistence (1981~1984). Before the reform, the RMB exchange rate was lower than the cost of earning foreign exchange from exports for a long time, but higher than the ratio of domestic and foreign consumer prices. In order to expand exports, the RMB needs to depreciate, but RMB depreciation is detrimental to non-trade foreign exchange earnings. In order to take into account both trade and non-trade needs, the government decided in August 1979 to implement an internal trade settlement exchange rate in addition to the official exchange rate from January 1, 1981. It is based on the average exchange cost of national exports plus a certain amount of profit. Calculated, it is significantly lower than the official exchange rate.

The second stage is to cancel the internal settlement exchange rate and enter a period of coexistence of official exchange rate and foreign exchange adjustment market exchange rate (1985-1993). The dual exchange rate system has obviously mobilized the enthusiasm of export enterprises, and the country's foreign exchange reserves have also increased. However, there are obvious problems with this arrangement: First, from the perspective of external relations, the IMF regards the dual exchange rate as a government subsidy for exports, and developed countries threaten to impose subsidy taxes on our exports. Second, from a domestic perspective, the dual exchange rate has caused confusion in foreign exchange management, and it cannot effectively curb imports when the foreign trade department still eats from the big pot. Therefore, the internal settlement price was canceled from January 1, 1985, and the RMB returned to a single exchange rate.

In order to cooperate with the reform of foreign trade and the implementation of the contracting system, our country has gradually eliminated financial subsidies, increased the proportion of foreign exchange retention since 1988, universally established foreign exchange adjustment centers, liberalized the adjustment of market exchange rates, and formed official exchange rates and adjustment market exchange rates. coexisting situation.

2. Socialist market economy period (1994 to present)

The first stage

The period of exchange rate unification and managed floating exchange rate system (1994~2005 July 2018). The overall goal of the national foreign exchange system reform in 1994 was to "reform the foreign exchange management system, establish a single, managed floating exchange rate system and a unified and standardized foreign exchange market based on market supply and demand, and gradually make the RMB a convertible currency." Specific measures include: first, implementing a single, managed floating exchange rate system based on market supply and demand. On January 1, 1994, the official RMB exchange rate and the foreign exchange adjustment price were integrated. Second, implement a bank foreign exchange settlement and sales system and cancel foreign exchange retention and surrender. Third, establish a national unified and regulated inter-bank foreign exchange market. The central bank manages the RMB exchange rate by participating in transactions in this market. The exchange rate of RMB announced to the outside world is the exchange rate formed in this market. In December 1996, my country achieved the current account convertibility of RMB, thus achieving an important step towards free convertibility of RMB.

After 1994, my country implemented a managed floating exchange rate system based on market supply and demand. However, except for a slight appreciation from January 1994 to August 1995, the nominal exchange rate of the RMB against the US dollar has always remained stable. relatively stable state. After the Asian financial crisis, the Chinese government further narrowed the floating range of the RMB exchange rate because the decoupling of the RMB from the US dollar may lead to an appreciation of the RMB, which is not conducive to export growth. In 1999, the IMF's classification of China's exchange rate system also changed from "managed floating" to "fixed peg to a single currency."

The second stage

On July 21, 2005, my country carried out reforms to improve the RMB exchange rate formation mechanism. The RMB exchange rate is no longer pegged to a single U.S. dollar. Instead, several major currencies are selected to form a currency basket, and changes in the RMB multilateral exchange rate index are calculated with reference to the basket of currencies. Implement a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies. Since the reform of the RMB exchange rate formation mechanism, the RMB has generally appreciated slightly based on market supply and demand. After the reform of the RMB exchange rate formation mechanism on July 21, 2005, the People's Bank of China announced the closing price of the U.S. dollar and other trading currencies against the RMB in the inter-bank foreign exchange market on that day after the market closes on each working day, as the closing price of the currency against the RMB on the next working day. the middle price.