Generally speaking, linking a currency to a basket of currencies or a specific currency (such as the US dollar) is an adjustable pegged exchange rate system. If the country has a high proportion of trade with a single country (like the foreign trade between China and the United States in the past, 90%), it is suitable to peg to a single currency; On the contrary, countries with many trading partners can peg to a basket of currencies.
Countries that adopt the pegged exchange rate system must regularly review the changes in the economic and financial situation and re-set the fixed exchange rate target.
Keep an eye on a basket of currencies and refer to a basket of currencies.
Century Business Herald Yao Zhizhong
"Reference to a basket of currencies" does not mean "pegged to a basket of currencies" exchange rate system. What's the difference between them? What impact will it have on the RMB exchange rate?
Advantages of basket system
The exchange rate system pegged to a basket of currencies came into being in the 1970s.
Under the exchange rate system pegged to a basket of currencies, all currencies in the basket are given a certain weight, so that the exchange rate of the domestic currency is weighted according to the exchange rate changes of all currencies in the basket, and the weighted average stable exchange rate of the domestic currency can be realized. For example, it may be easier to understand the meaning of the exchange rate system pegged to a basket of currencies.
If the RMB is pegged to a currency basket, the basket consists of three currencies: the US dollar, the euro and the Japanese yen, and the weights of these three currencies in the basket are 50%, 25% and 25% respectively. Now let's look at the situation that both the euro and the yen have appreciated 10% against the US dollar.
If the renminbi is pegged to the dollar, the appreciation of the euro and the yen against the dollar will not affect the exchange rate of the renminbi against the dollar. However, the appreciation of the euro and the yen against the US dollar 10% means that the euro and the yen have also appreciated against the RMB 10%. If the RMB is pegged to the above basket of currencies, the euro will appreciate by 10% against the Japanese yen and the RMB will appreciate by 5% against the US dollar. At this time, the exchange rate between RMB and USD is no longer stable. However, when the RMB appreciates by 5% against the US dollar, it will depreciate by 5% against the euro and the Japanese yen. In this way, the RMB gained the stability of the weighted average exchange rate through the fluctuation of the exchange rate against the US dollar to a certain extent.
It can be seen that the main advantage of pegging to a basket of currencies is that it can effectively avoid the impact and structural imbalance brought about by the exchange rate changes of other currencies in the world and realize the relative stability of the local currency exchange rate. Secondly, under the exchange rate system of pegging to a basket of currencies, although the pegged currencies have the same exchange rate against a basket of currencies, the exchange rate of various single currencies will fluctuate, which will help residents and enterprises to form a strong awareness of exchange rate risk, and also help to cultivate the forward market and produce hedging tools in the foreign exchange market. If there is no exchange rate fluctuation, hedging instruments in forward market and foreign exchange market will not be produced or used. Third, after adopting the currency basket, the exchange rate will be more flexible and will fluctuate frequently, which is conducive to the transition to a more flexible exchange rate system. Finally, but perhaps the most important point at present, pegging to a basket of currencies helps stabilize exchange rate expectations.
In fact, the exchange rate system pegged to a basket of currencies gives a law of exchange rate changes. Under this rule, the exchange rate changes will not be based on the basic situation of a country's balance of payments, but on the exchange rate changes of other currencies in the currency basket. Therefore, the expectation of exchange rate changes will be transferred to the expectation of exchange rate changes in other currencies, and the balance of payments situation of a country will be avoided as the basis for forming the expectation of exchange rate changes.
Three wave modes
Of course, the exchange rate system pegged to a basket of currencies also has its inherent defects: first, strictly pegged to a basket of currencies will lose the initiative to adjust the exchange rate, and the change of the local currency exchange rate is passively adjusted according to the exchange rate of a basket of currencies; Secondly, the change of local currency exchange rate does not reflect the market supply and demand of local currency. Therefore, the exchange rate system pegged to a basket of currencies does not conform to the direction of market-oriented reform or market-oriented reform. Third, pegged to a basket of currencies cannot avoid the impact of non-exchange rate factors on the balance of payments. However, does the exchange rate system adjusted with reference to a basket of currencies lose some benefits of pegging to a basket of currencies while avoiding the disadvantages of pegging to a basket of currencies? Comparing the possible change patterns of RMB exchange rate under these two exchange rate systems is helpful to identify the advantages and disadvantages of "adjusting with reference to a basket of currencies".
As mentioned above, under the strict exchange rate system pegged to a basket of currencies, the exchange rate changes of currencies are passively changed according to the exchange rate changes of a basket of currencies. Under the reference basket exchange rate system, the currency will change in three ways:
One is the daily fluctuation, that is, the fluctuation within plus or minus 3‰ of the closing price of the previous trading day every day.
The second is to adjust the middle price with reference to the currency basket. That is, when the exchange rate of some currencies in the currency basket fluctuates greatly, so that the closing price of the US dollar against the currency is at the end of the range and cannot cover this fluctuation range, the monetary authorities can re-determine a middle price with reference to the currency basket instead of using the closing price of the previous day as the middle price of the next day.
The third is to expand the floating range of exchange rate when necessary, that is, the monetary authorities can expand the fluctuation range to a larger range when necessary. To expand the floating range, it is necessary to reform and adjust the foreign exchange trading market, the trading system between designated foreign exchange banks and residents and enterprises, the management system of foreign exchange positions of banks and the compulsory settlement and sale of foreign exchange, otherwise it will affect the trading efficiency of the whole foreign exchange market. What needs to be emphasized in particular is that even the fluctuation within the daily interval is not completely free. Monetary authorities not only buy and sell at both ends of the range, but also can trade at any price in the range as a member of the foreign exchange trading market. Therefore, the monetary authorities actually have the ability to determine the daily closing price.
It can be seen that the biggest difference between adjusting with reference to a basket of currencies and keeping a strict eye on a basket of currencies is that the former retains the initiative and control of the monetary authorities in adjusting the exchange rate, but cannot enjoy the benefits brought by stabilizing exchange rate expectations, while the latter replaces the arbitrary intervention of the central bank with clear rules, which can quickly stabilize exchange rate expectations, but at the same time loses the initiative of the monetary authorities in adjusting the exchange rate. In fact, this is an old policy issue, which compromises between camera selection and rules.
Potential risks and countermeasures
At the same time, we should also realize that the potential risks that may be brought about by referring to a basket of monetary systems are mainly as follows:
First, the large-scale capital inflow brought about by the expected strengthening of appreciation. The balance of payments is still an important basis for adjusting the currency exchange rate, and the low appreciation obviously cannot reflect the undervaluation of the currency exchange rate reflected by a country's balance of payments (especially the huge trade surplus). Therefore, the low appreciation rate not only strengthens the expectations of those who once thought that the currency would appreciate, but also makes the promise of maintaining the stability of the currency exchange rate no longer credible, which hits the expectations of those who think that the currency will remain stable, and will make these people quickly join the ranks of those who have expectations of currency appreciation. The result is a large-scale conversion of foreign exchange into currency.
Second, short-term operations may face speculative shocks. Adjusting the currency exchange rate with reference to the currency basket is limited to a certain range, with the largest fluctuation range, which is sometimes incompatible. As mentioned earlier, the floating range sometimes can't digest the changes in the value of the currency basket. Although the monetary authorities did not announce the composition of the basket, and pointed out that the currency basket is only a reference for currency exchange rate adjustment. However, a meaningful currency basket must include at least USD, EUR and JPY. Therefore, once the exchange rate between the US dollar, the euro and the Japanese yen changes drastically, it is entirely possible for the market to expect the closing price of the currency exchange rate, even at the end of the floating range, which is not enough to reflect the changes in the value of the currency basket, and it is entirely possible for the monetary authorities to adjust the middle price in the future by "referring to the currency basket". In this case, the currency is more likely to be hit by short-term speculation.
Then, for sustained and large-scale capital inflows, some possible countermeasures are:
1. Clearly announced the adoption of the exchange rate system pegged to a basket of currencies, and announced the composition of the currency basket. So as to give the market a clear law of currency exchange rate change. Transfer the expectation of currency appreciation to the expectation of depreciation of major currencies in the basket. However, this will temporarily lose the flexibility to adjust the currency exchange rate. In international communication, the weight of negotiation will also be lost.
2. Announce the expansion of the floating range of currency exchange rate, and promise not to change the range for a certain period of time. This requires rapid reform and adjustment of the foreign exchange trading market, the trading system between designated foreign exchange banks and residents and enterprises, the bank's foreign exchange position management system and the compulsory foreign exchange settlement and sale system.
Third, through the intervention of the monetary authorities in the foreign exchange market, the currency exchange rate fluctuates repeatedly in a narrow range. Although this method may have some effect, it is not a long-term solution, and the actual effect depends on market psychology.
Fourth, stricter capital controls. This is the last resort to hinder reform.
5. The currency has greatly appreciated. This is the simplest way to change the expectation of appreciation in the short term, but excessive appreciation will have a greater impact on the real economy.
Each of the above measures has its advantages and disadvantages. But on the whole, the first measure is relatively superior in the short term, and the second measure is relatively superior if there is enough time.
(The author is an associate researcher at the Institute of World Economics and Politics, Chinese Academy of Social Sciences)