Structural Evolution of RMB Exchange Rate Reform: Historical Review, Experience and Prospect

Abstract

The Renminbi (RMB) exchange rate regime reform has gone through three stages roughly once every decade since 1994. It is a structural evolution through the unification of dual exchange rates, increased fluctuations and central parity rate reform in response to the dynamic macro environment in China and abroad. This paper unpacks leading and supporting reforms for each stage and reviews the effects. The reform has developed historical experience in adopting progressive strategies, avoiding sharp exchange rate fluctuations in the near term, maintaining appropriate capital controls, and guaranteeing the reform through domestic structural reforms. Achieving a free-floating exchange rate will be the ultimate goal, but it will not be made easily in the short run. During the transitional period, it is recommended that an annual target zone for RMB's effective exchange rate be arranged for the CFETS currency basket, along with necessary capital controls.