CATO JOURNAL past decade, there have also been large swings in growth and in inflation rates. Those swings probably could have been reduced had the authorities been able to rely more heavily on domestic interest rates and on a more flexible exchange rate as stabilizers. Imposing administrative controls on bank lending, tweaking controls on capital flows, and engaging in large-scale exchange market intervention and sterilization operations does not constitute a sensible long-term framework for conducting stabilization policy in China-even if bot It is time for China to change both its exchange rate andhis, expected The Currency Reform of July 21, 2005 Some observers have argued that the needed currency reform in China is already well under way. On July 21, 2005, the PBC an- nounced that China was revaluing immediately the RMB with respect to the U. S dollar by 2 percent. It also indicated that it would"further strengthen the managed floating exchange rate based on market sup ply and demand, "and that"the RMB exchange rate will be more flexible based on market condition[s with reference to a basket of currencies"( People's Bank of China 2005) Contrary to what was implied in some news accounts, the previous (daily)fluctuation band with respect to the dollar--no more than a 0.3 percent fluctuation from the previous day's closing valuewas retained, not widened. On September 25, 2005, the daily fluctuation band with respect to nondollar currencies was widened from the previous 1.5 percent to 3 percent. The scope for participation in the foreign exchange market and for instruments of foreign exchange rading have also been expanded somewhat It is too soon to evaluate with confidence the longer-term signifi- ance of the July 21 currency reform. But it is not too early to offer everal observation First, those who argued at the time of the July 21 announcement that the 0.3 percent daily fluctuation limit for the RMB vis-a-vis dollar could just be Chinas way of implementing a large and relatively rapid appreciation of the RMB with respect to the dollar-e g, a 0.3 per cent appreciation per day continuing over 60 days would produce n 18 percent appreciation of the RMB--have been disappointed The RMB/dollar rate today is little different(about 1 percent more appreciated)from where it was on July 22, 2005. Also, the appre ciation in the real trade-weighted RMB that took place in 2005 re- flected primarily an appreciation of the dollar with respect to otherpast decade, there have also been large swings in growth and in inflation rates. Those swings probably could have been reduced had the authorities been able to rely more heavily on domestic interest rates and on a more flexible exchange rate as stabilizers. Imposing administrative controls on bank lending, tweaking controls on capital flows, and engaging in large-scale exchange market intervention and sterilization operations does not constitute a sensible long-term framework for conducting stabilization policy in China—even if bot￾tom-line outcomes have been better than might have been expected. It is time for China to change both its exchange rate and its currency regime. The Currency Reform of July 21, 2005 Some observers have argued that the needed currency reform in China is already well under way. On July 21, 2005, the PBC an￾nounced that China was revaluing immediately the RMB with respect to the U.S. dollar by 2 percent. It also indicated that it would “further strengthen the managed floating exchange rate based on market sup￾ply and demand,” and that “the RMB exchange rate will be more flexible based on market condition[s] with reference to a basket of currencies” (People’s Bank of China 2005). Contrary to what was implied in some news accounts, the previous (daily) fluctuation band with respect to the dollar—no more than a 0.3 percent fluctuation from the previous day’s closing value—was retained, not widened. On September 25, 2005, the daily fluctuation band with respect to nondollar currencies was widened from the previous 1.5 percent to 3 percent. The scope for participation in the foreign exchange market and for instruments of foreign exchange trading have also been expanded somewhat. It is too soon to evaluate with confidence the longer-term signifi￾cance of the July 21 currency reform. But it is not too early to offer several observations. First, those who argued at the time of the July 21 announcement that the 0.3 percent daily fluctuation limit for the RMB vis-à-vis dollar could just be China’s way of implementing a large and relatively rapid appreciation of the RMB with respect to the dollar—e.g., a 0.3 per￾cent appreciation per day continuing over 60 days would produce an 18 percent appreciation of the RMB—have been disappointed. The RMB/dollar rate today is little different (about 1 percent more appreciated) from where it was on July 22, 2005. Also, the appre￾ciation in the real trade-weighted RMB that took place in 2005 re￾flected primarily an appreciation of the dollar with respect to other CATO JOURNAL 262