Chinese Foreign Exchange Policies and Asian Currencies

Author Name ITO Takatoshi  (Faculty Fellow, RIETI)
Creation Date/NO. April 2008 08-J-010
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This paper conducts an econometric examination on changes in foreign exchange policies of China and Asia before and after China's policy changes in July 2005. Foreign exchange policies in China and Asia are an important component of global issues connected with international finance. Before July 2005, policies in China and some other Asian countries were based on de facto, fixed exchange rates systems against the U.S. dollar (dollar-peg). A rise in the current-account surplus and massive currency intervention in China triggered pressure from other countries and international organizations on China to change its foreign exchange policies. In July 2005, China responded by allowing the yuan to appreciate against the dollar. At the time of the policy changes, the official statement mentioned discarding the dollar-peg and adopting reference to a basket value. Several patterns exist in the foreign exchange policies of emerging Asian countries other than China. Dollar-peg systems were also adopted by Hong Kong (before the Asian Currency Crisis) and Malaysia (from September 1998). Singapore adopted a basket system (the weighted average value of the currencies of its main trading partners) even before the Asian Currency Crisis. After the Asian crisis, several countries including Thailand and Korea adopted flexible exchange rate regimes. Interventions, though differing in scale, were also carried out in an effort to stabilize values against the dollar. This report rigorously estimates the weight of basket currencies and examines how the foreign exchange policies of countries other than China were altered before and after China's policy changes. The results show that the foreign exchange policies adopted by China after the July 2005 reform are in no way a basket system; they are instead a crawling peg?gradual appreciation?against the dollar. The degree of appreciation and volatility of most other currencies of emerging Asian economies after the reform has been larger than that of the yuan.