In developed market economy countries, floating exchange rate system (also known as free exchange rate system) is implemented. That is, the formation of exchange rate is determined by the demand and supply of foreign exchange market. Take the American market as an example. For example, if American funds want to buy EU bonds, they need to exchange dollars for euros, thus forming the dollar supply in the foreign exchange market. When a European design unit and airport maintenance department buy American computer software and Boeing aircraft accessories respectively, they need to convert euros into dollars, which forms the demand for dollars in the foreign exchange market. The dollar demand in the foreign exchange market changes with the trade volume between the United States and Europe. When the United States has a trade surplus with Europe, Europeans buy more American goods than Americans buy European goods. This means that in order to buy more American goods, Europeans have to spend more euros to buy dollars, thus forming an increase in the demand for dollars in the foreign exchange market; On the contrary, when the trade surplus of the United States with Europe decreases, the demand for dollars in the foreign exchange market will decrease. On the other hand, when the net investment of American companies in Europe is positive, it means buying more euros with dollars, so the supply of dollars and its changes are mainly affected by changes in interest rates. When the domestic interest rate in the United States rises, it will reduce the supply of dollars in the foreign exchange market; When interest rates fall, it will increase the supply of dollars.

The equilibrium price formed by the above supply and demand relationship in the foreign exchange market is the exchange rate of the US dollar against the Euro. The exchange rate around the equilibrium price fluctuation regulates the supply and demand of the US dollar. When the exchange rate of the US dollar is higher than the equilibrium point, the supply of the US dollar will exceed the demand, and the US dollar will face depreciation pressure. When it is below the equilibrium point, the supply of dollars will be less than the demand, thus creating pressure to make the dollar appreciate. When the exchange rate value of the equilibrium point is reached, the dollar demand formed by European purchases of American products is exactly equal to the dollar supply of American purchases of European assets. In practice, changes in tariffs and trade policies, sudden political, economic and social events, capital flows when large-scale international investment or speculation occurs, and the role of the Federal Reserve or other central bank monetary policy tools will make the exchange rate change in the direction of depreciation or appreciation.

China's RMB exchange rate formation mechanism is different from the free exchange rate system. Since 1994, RMB has been freely convertible under the current account (referring to products and services of various industries), but the capital account has not been opened (referring to foreign exchange, securities, insurance and other non-current account areas). As ordinary people can feel: units and individuals, whether Chinese or foreign, can freely convert US dollars or other foreign exchange into RMB; On the other hand, they cannot freely convert RMB into US dollars and other foreign currencies unless they have passed the necessary administrative examination and approval procedures and are restricted by policies, indicators and quotas.

Under the condition that the capital account is not freely convertible, the formation of RMB exchange rate is still determined by the government in essence, not the result of fluctuations in the international foreign exchange market. This is a stable exchange rate mechanism, which is determined by the government, subject to administrative control, and maintains a fixed exchange rate with the US dollar, also known as pegged to the US dollar exchange rate. Its most important feature is that no matter whether other currencies appreciate or depreciate, the exchange rate of RMB against them is converted from their exchange rate against the US dollar. In other words, when the exchange rate of the US dollar appreciates against other currencies, the RMB will appreciate with the US dollar; The dollar depreciated, and the renminbi depreciated with the dollar.

This RMB exchange rate stabilization mechanism has helped China's economy achieve the policy goal of "exporting more and importing less". It has created long-term high growth performance of China's export products, especially to the American and European markets, and increased the country's foreign exchange reserves. At the same time, it will help China's fragile financial system to maintain stability in the turbulent international financial environment. However, it needs to be clear that up to now, the RMB exchange rate is not the exchange rate under the market mechanism, which makes the real value of RMB unable to be reflected. Moreover, due to regulation, the demand and supply of the foreign exchange market will be restrained to a certain extent, making it difficult for domestic enterprises and citizens to take advantage of some international business opportunities, and it is also difficult for the domestic industrial structure to adjust spontaneously with the change of market signals, and the benefits that people can get from the high export growth will also be discounted. These are the costs of maintaining the current RMB exchange rate mechanism.