What is a Floating Exchange Rate?
The floating exchange rate refers to the foreign currency value of a country's currency under the paper currency system. According to the supply and demand situation in the foreign exchange market, it can be allowed to fluctuate freely. The current international exchange rate system is the floating exchange rate system. [1]
- [fú dòng huì l]
Floating exchange rate means that there is no upper and lower limit fluctuation range for the exchange rate of a country's currency to another country's currency, and it is determined by the supply and demand relationship of the foreign exchange market. On August 15, 1971, the United States implemented a new economic policy and allowed the US dollar exchange rate to float freely. By 1973, countries had generally adopted a floating exchange rate system. It was also from then on that the foreign exchange market continued to develop with the constant fluctuations of various exchange rates.
Floating exchange rates are divided into free floating exchange rates and managed floating exchange rates based on whether the government intervenes. In real life, the government does not take any intervention measures on the exchange rate of its national currency, and few countries adopt completely free floating exchange rates. Because the exchange rate has a significant impact on the country's balance of payments and the economic equilibrium, most governments in various countries control the direction of the exchange rate by adjusting interest rates, buying and selling foreign exchange on the foreign exchange market, and controlling capital movements.
On July 21, 2005,
Both the fixed exchange rate system and the floating exchange rate system are not suitable for China's national conditions.
RMB exchange rate in August 2005
Floating exchange rate
Therefore, the choice of the RMB exchange rate system should consider a more flexible exchange rate system in between. A managed floating exchange rate system is a better choice because it absorbs the characteristics of exchange rate flexibility under the floating exchange rate system and the relative stability of the exchange rate under a fixed exchange rate. It is a more flexible exchange rate mechanism and is more suitable for China. National conditions and the future development of China's economy and finance. First of all, China's economic and financial markets are still imperfect, and macroeconomic expectations are relatively unstable. Since the reform and opening up, China's economic system and economic structure have undergone tremendous changes, but there are still many problems. The financial market is not yet a complete and effective market. It does not have sound financial regulations, high-level supervision teams, and Qualified professionals, good investment ideas and other conditions. At the same time, in the process of further reform and expansion of China's opening up to the outside world, the expectations of macroeconomic fluctuations are highly uncertain, and the actual degree of opening up to the outside world is relatively low. We cannot rely too much on the regulatory effect of exchange rates on economic growth. Therefore, it is not appropriate to adopt a completely floating exchange rate system. Second, China's economic liberalization is still relatively low: China still has more controls in the areas of trade and investment, and the RMB interest rate is still a non-market-based interest rate. In this case, the price formed cannot truly reflect the market supply and demand, so the monetary authorities need to correct this situation in a timely manner, so-called managed is necessary. Third, the renminbi is not yet convertible under the capital account, so it is not appropriate to adopt a completely floating exchange rate system. However, in the face of increasingly frequent international capital flows, especially the deepening of China's integration of the world economy, in the long run, relaxation of capital flows and foreign exchange controls is a necessary process, and most of the major trading partner countries Both have adopted a flexible exchange rate system, so China's adoption of a managed floating exchange rate system is a scientifically correct choice. The management performance of China's managed floating exchange rate system is clearly defined in the direction of the RMB exchange rate reform: the implementation of a managed floating exchange rate system based on market supply and demand, adjustment with reference to a basket of currencies. As far as a basket of currencies is concerned, according to the actual situation of China's foreign economic development, several major currencies are selected, and corresponding weights are given to form a currency basket. There is not only a currency issue here, but more importantly, a weight issue. Even though the central bank announced the composition of the currencies, the weights remain confidential. A reference to a basket indicates that changes in exchange rates between foreign currencies will affect the RMB exchange rate. However, referring to a basket is not equivalent to pegging a basket of currencies. It also needs to take market supply and demand as another important basis, and thus form a managed floating exchange rate. This is why so many economists of foreign banks are keen to calculate the weight of each currency in this basket of currencies, thinking that they can grasp the fluctuation trend of the RMB exchange rate. Currency weight, but the central bank s adjustment of the RMB exchange rate is only a reference adjustment, not directly linked, but based on domestic and foreign economic and financial situations, based on market supply and demand, with reference to a basket of currencies to calculate changes in the RMB multilateral exchange rate index, the RMB exchange rate For management and adjustment, its flexibility and controllability are great. In other words, the new system leaves a lot of room for the central bank to conduct exchange rate regulation. Because of this, it also increases the influencing factors of exchange rate formation and the uncertainty of exchange rate changes. This relatively increases the flexibility of the RMB exchange rate, and at the same time leaves enough room for the central bank to intervene in the foreign exchange market, thereby ensuring that the RMB exchange rate is basically stable at a reasonable and balanced level.
This is exactly the science and correctness of China's managed floating exchange rate system.
The management of China's managed floating exchange rate system is also manifested in the adherence to the principles of initiative, controllability and gradual progress in the reform of the RMB exchange rate. The initiative mentioned here is to determine the method, content and timing of exchange rate reform mainly in accordance with China's own reform and development needs. The exchange rate reform must fully consider the impact on macroeconomic stability, economic growth and employment. The controllability mentioned here is that the changes in the RMB exchange rate must be controlled in macro management. It is necessary to promote reform without losing control, and to avoid financial market turbulence and large economic fluctuations. The gradualism mentioned here is to take full account of the bearing capacity of various parties in accordance with market changes and advance the reform step by step.
At the end of 2005, Li Deshui, the director of the National Bureau of Statistics, said in a question to reporters: "The reform of the exchange system is a major reform and a smart reform plan. It was only half a year after the plan was introduced. It has proven successful in practice and cannot be changed overnight. It is change. This policy will be maintained for a long time. Exchange rate policy should not be changed frequently and randomly. It is very prudent. "
The People's Bank of China recently announced that since April 16, 2012, the floating range of the RMB-US dollar exchange rate in the inter-bank spot foreign exchange market has increased from five thousandths to one percent, that is, the daily inter-bank spot foreign exchange market The exchange rate of RMB against the US dollar may fluctuate within a range of 1% above and below the mid-day price of RMB against the US dollar announced by the China Foreign Exchange Trading Center.
