Cost of Maintaining a Stable Exchange Rate Reform on July 21st, 2005 Reform in 2005> tried to alleviate the pressure RMB would no longer be pegged to the us dollar but a basket of currencies and the rmb exchange rate regime will be improved with greater flexibility RMB rate was adjusted to 8. 11/ US dollar at the time f 19: 00 hours of July 21, 2005 Closing of the market on each working day central parity for the trading against t Reform on july 21st, 2005 Further reforms The daily trading price of the USD against RMB will 2005-9-24, daily trading band for RMB and non-dollar continue to be allowed to float within a band of span currencies widen fron±0.15%to±03% t 0. 3% around the central parity PBOC is responsible for maintaining the RMB trading was introduced exchange rate basically stable at an adaptive and equilibrium level USD wou| d be widened fron±0.3%to±0.5% PBOC will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial MAA A RMB Rate before 2008 Financial Crisis Impossible Trinity after the 2005 Reform Expectation for appreciation attracted more capital after 2005 Hot money came as also as "fake exporting Larger pressure for PBoc to sterilize the forex reserve more Inflation did not The Chinese government began to raise interest rate since the second half of 2006 But, the 2008 global financial crisis came up 102016/11/2 10 Cost of Maintaining a Stable Exchange Rate 4-55 Reform on July 21st, 2005 • Reform in 2005 tried to alleviate the pressure • RMB would no longer be pegged to the US dollar but a basket of currencies and the RMB exchange rate regime will be improved with greater flexibility. • RMB rate was adjusted to 8.11/US dollar at the time of 19:00 hours of July 21, 2005. • Closing of the market on each working day will be the central parity for the trading against the RMB on the following working day. 4-56 Reform on July 21st, 2005 • The daily trading price of the USD against RMB will continue to be allowed to float within a band of span ± 0.3% around the central parity. • PBOC is responsible for maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level. • PBOC will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation. 4-57 Further Reforms • 2005-9-24, daily trading band for RMB and non-dollar currencies widen from ±0.15% to ±0.3% • 2006-4-6, market-maker mechanism for RMB fixing and trading was introduced. • 2007-5-18, PBOC announced daily trading band for RMB and USD would be widened from ±0.3% to ±0.5% 4-58 4-59 RMB Rate before 2008 Financial Crisis 6.80 7.00 7.20 7.40 7.60 7.80 8.00 8.20 2005/7/22 2006/1/20 2006/7/21 2007/1/19 2007/7/20 2008/1/18 2008/7/18 4-60 Impossible Trinity after the 2005 Reform • Expectation for appreciation attracted more capital after 2005 • Hot money came as also as “fake exporting” • Larger pressure for PBoC to sterilize the forex reserve, more money issuing • Overheating in the economy – Real estate boom – stock market bubble in 2007 – Inflation did not come up until 2007 • The Chinese government began to raise interest rate since the second half of 2006. • But, the 2008 global financial crisis came up!