(1) compulsory bank settlement and sale system. The institutional arrangement of foreign exchange settlement and sale is mandatory to a great extent, and the foreign exchange earned by enterprises must be unconditionally sold to foreign exchange banks. Enterprises can't hold foreign exchange accounts (although large foreign trade enterprises are allowed to hold some foreign exchange in the future, but it is strictly restricted), and they can't choose the right selling time and quantity according to future demand and expectations of future exchange rate trends. For enterprises' demand for foreign exchange, tradable foreign exchange under current account is met through the sale of foreign exchange by foreign exchange banks, while non-tradable foreign exchange under current account is subject to strict foreign exchange examination and approval control. Under this system, it is impossible for enterprises to hold foreign exchange willingly, so the exchange rate formed by "strong selling" cannot be the real market price.
(2) The inter-bank foreign exchange market is closed and strictly controlled. The inter-bank foreign exchange market is the foreign exchange trading market between banks. The original intention of establishing this market is to improve the RMB exchange rate formation mechanism. However, in practice, this goal has not been achieved, because there are serious defects in this market:
First, a closed rather than an open market. The inter-bank foreign exchange market implements the membership system. As the main body of the market, the membership of designated foreign exchange banks must be approved by the central bank or the State Administration of Foreign Exchange, and must conform to strict market access rules, thus making the market lose its openness and become a closed market.
Second, a strictly controlled market. Because the central bank has strict regulations on the amount of foreign exchange held by designated foreign exchange banks, it is difficult for designated foreign exchange banks to hold foreign exchange willingly, and it is difficult to maximize profits and avoid foreign exchange risks according to a reasonable combination of local and foreign currency assets. More importantly, in the inter-bank foreign exchange market transactions, because the central bank is actually in a monopoly position, that is, the central bank has the right to control the number of foreign exchange banks and the central bank has huge foreign exchange reserves and money supply rights, so the central bank has absolute control over the formation of the RMB exchange rate in this market. The absolute monopoly position of the central bank in the market makes the government's will naturally penetrate into the exchange rate.
Third, passively intervene in the market. In the inter-bank foreign exchange market, the central bank is in a passive intervention position. When the transactions between designated foreign exchange banks cannot be completely matched, the central bank will make up for the shortage of positions to ensure the "liquidation" of the whole market. This passive intervention ensures the effective operation of the market, but it also has a great negative impact on the formation of the RMB exchange rate. Because of this passive intervention, the central bank has been greatly restricted in adopting a flexible intervention model. As a result, the managed floating exchange rate system is only managed and lacks floating, and the RMB exchange rate tends to be rigid. Undoubtedly, this situation has had an extremely adverse impact on the authenticity and representativeness of RMB reflecting the price of foreign exchange resources, which has seriously restricted the further development of the efficiency of market allocation of foreign exchange resources.
Fourth, the monotonous market. The currencies traded in the inter-bank foreign exchange market in China are limited to a few currencies such as US dollars, and the trading volume is mainly US dollars. There are almost no forward and futures transactions, and there are almost no other derivatives except a few banks that are qualified to handle RMB forward transactions. The types and methods of transactions in the inter-bank foreign exchange market have an important impact on the volume of foreign exchange transactions. It goes without saying that the real inter-bank foreign exchange market must have a certain number of trading subjects and form a multi-level market structure, thus having a considerable trading scale. Otherwise, it is impossible to form an active foreign exchange market and a reasonable market exchange rate. The managed floating exchange rate system based on market supply and demand in China 1994 has gradually evolved into a fixed exchange rate arrangement under the influence of objective factors and some subjective factors. Since the Asian financial crisis, China's RMB exchange rate system has borne a heavy burden, including political factors. China insists that the RMB will not depreciate, which has played an important role in stabilizing the Asian economy and finance. The stability of RMB exchange rate has become an extremely important symbol of China's political and economic stability. Because of this, the RMB exchange rate has become rigid, that is, it lacks elasticity or elasticity and loses its adjustment function.
The inflexibility of RMB exchange rate system has caused a series of problems, which has become a serious hidden danger to China's financial security, most obviously weakening the risk awareness of enterprises. The long-term narrow fluctuation of exchange rate not only restricts the basic role of the market in guiding the allocation of foreign exchange resources, but also leads the market to ignore exchange rate risks. Under the basically fixed exchange rate arrangement, the market and enterprises have a weak awareness of exchange rate risks, and rarely consider and take into account risks in their operations, investment and financing activities, resulting in the emergence and accumulation of certain risks, such as the generation of a large number of bad debts, which is an important condition for the financial crisis.
Due to the lack of flexibility or elasticity of RMB exchange rate, there is a big gap between the nominal exchange rate of RMB and the actual effective exchange rate. Under the single pegged exchange rate arrangement, because the floating range of the exchange rate is within a narrow range, it is difficult for the exchange rate to adjust the exchange rate changes between other currencies in time, especially to respond to the exchange rate changes between the US dollar and other major reserve currencies and their effects. The result is often that the nominal exchange rate remains stable on the surface, but the real effective exchange rate deviates.
In China's trade structure, the trade volume with the US dollar zone accounts for about 50% of the total trade volume, while the trade volume with non-US dollar zones, namely, Japan, the euro zone and Southeast Asia, accounts for about half of the total trade volume. China's current exchange rate policy only pays attention to maintaining the stability of the exchange rate with the US dollar area, but pays insufficient attention to the exchange rate stability of trading partners in non-US dollar areas. There has been a trend of continuous depreciation of the US dollar, which has correspondingly led to the appreciation of these currencies. It is these factors that lead to the decline of the real effective exchange rate of RMB.
When RMB exchange rate 1994 merged, the daily fluctuation range of RMB against the US dollar in China's inter-bank foreign exchange market was 0.3% above and below the middle price, but in fact, the daily fluctuation range of RMB exchange rate was only a few basis points. The narrow fluctuation of RMB exchange rate is largely due to the fact that the central bank, as an important participant in the inter-bank market, participates in market transactions almost every day to make up for the difference between buying and selling in the market, thus affecting the exchange rate generation. This has formed a game pattern between the central bank and the market, resulting in the policy sensitivity of exchange rate changes. If the exchange rate fluctuates greatly, it may send a policy signal to the market that the government condones or manipulates the depreciation or appreciation of the exchange rate, thus making the exchange rate fluctuation more sensitive in policy and further restricting the flexibility of exchange rate policy operation. During the period of 1996, China realized the convertibility of RMB under the current account and strictly controlled the capital account, which made the foreign exchange supply and demand in the inter-bank foreign exchange market depend on the trade account. The purchasing power of money is the most direct and important factor related to trade, which largely determines the need to choose purchasing power parity theory as the theoretical model to determine the exchange rate level of RMB. However, under the circumstances that the RMB exchange rate system has gradually evolved into a fixed exchange rate arrangement, there are major defects in calculating the equilibrium exchange rate of RMB against the US dollar with purchasing power parity. For example, the preconditions of purchasing power parity theory (such as sufficient information, zero transaction cost and zero tariff) are almost completely unsatisfied, and because the general price level of purchasing power parity theory includes both tradable goods and nontradable goods, its calculation results are bound to have considerable deviation. Obviously, in theory, the current adjustment of RMB exchange rate lacks sufficient basis.
In practice, the current adjustment of RMB exchange rate also lacks accurate basis. When the exchange rate is determined by the relationship between supply and demand in the foreign exchange market, this market is very narrow, and it is limited to the foreign exchange supply and demand derived from trade items under the current account. However, due to the information asymmetry between the central bank and the designated foreign exchange banks, the central bank cannot obtain the complete information needed for accurate pricing. On the other hand, the uncertainty of exchange rate changes caused by the change of supply and demand preference leads to the lag of central bank's regulation and pricing, and even misjudgment. In the case of information asymmetry and uncertainty, it is difficult for the central bank to calculate an exchange rate level that "clears" the balance between supply and demand no matter what method it adopts. When the central bank cannot determine the equilibrium exchange rate level, the adjustment of the exchange rate level has to rely mainly on experience and reference indicators such as the black market exchange rate level and export exchange cost, which greatly reduces the accuracy of the adjustment. The cost of maintaining the current RMB exchange rate system is relatively high, and the costs to be paid mainly include the following aspects:
(1) Increase the difficulty of flexible operation of monetary policy. Under the condition of free capital flow, there will be no independent monetary policy in the fixed exchange rate system, and monetary policy can only be used to maintain the stability of the exchange rate; Under the condition of capital control, it is difficult for capital to flow freely for arbitrage activities, interest rate parity will no longer play a role, and monetary policy under the fixed exchange rate system will regain its autonomy. However, the practice in China shows that even under the condition of capital control, the autonomy of monetary policy is still greatly affected, and because of the effectiveness of capital control, the limitation of the means of sterilization by monetary authorities and the uncertainty of trade balance, sometimes the direction of monetary policy runs counter to the macroeconomic policy objectives.
(2) Increase the financial burden. In the case that the US dollar remains strong relative to major currencies, if the exchange rate of RMB against the US dollar is absolutely stable, it is bound to increase the difficulty of China's export growth, and expanding exports is an important way to maintain economic growth. In order to stimulate exports, China has taken measures such as increasing export tax rebate rate and subsidizing export commodities. The results are as follows: on the one hand, it has maintained the growth of exports and played an important role in stimulating economic growth; On the other hand, it also increases the national financial expenditure and induces moral hazard such as tax fraud in export.
(3) Increase the cost and difficulty of foreign exchange management. In order to maintain the current RMB exchange rate system, China has to rely on the power of foreign exchange control to achieve the set goals of policy operation. Before 1998, in order to alleviate the pressure of RMB exchange rate appreciation, the central bank strengthened the management of bank settlement, and clearly stipulated that international commercial loans borrowed by Chinese-funded enterprises could not be converted into RMB. After 1998, in response to the pressure of RMB exchange rate depreciation brought by the Asian financial crisis, the central bank increased the authenticity audit of bank foreign exchange settlement and sale management. There is no doubt that strict control will inevitably increase management costs. Under the current RMB exchange rate system, because the RMB exchange rate is basically fixed and the exchange rate is risk-free, when there is a spread between domestic and foreign interest rates, it will inevitably lead to risk-free arbitrage opportunities. Although this arbitrage activity has a certain cost under the foreign exchange control of China's capital account, as long as the income exceeds the cost, it will still be arbitrage through illegal evasion of foreign exchange. This situation increases the difficulty of foreign exchange management in capital account.
(4) Increase the cost and risk of foreign exchange reserves. Under the current RMB exchange rate system, banks, enterprises and residents are unable to hold foreign exchange willingly due to the implementation of compulsory settlement and sale of foreign exchange, current account convertibility and the central bank's control over the limit of foreign exchange positions of designated foreign exchange banks, while the central bank holds a considerable amount of foreign exchange in the form of national foreign exchange reserves. This situation has led to the sustained rapid growth of China's foreign exchange reserves, from $265,438.802 billion at the beginning of 1994 to $609.9 billion at the end of 2004. Holding such a huge foreign exchange reserve can be regarded as an important symbol of China's stable RMB exchange rate system and good economic development momentum, or an important symbol of market stability and confidence, but it has had a series of negative effects on economic development, the most prominent of which is:
First, pay a huge cost. Because foreign exchange reserves are foreign exchange assets used to pay off the balance of payments deficit, conduct foreign exchange transactions and international debt settlement, and intervene in the foreign exchange market, and this important resource must have a high liquidity premise, foreign exchange reserves are temporarily idle or can only obtain very low returns. It can be concluded that the larger the scale of foreign exchange reserves, the lower the efficiency of resource utilization and the higher the cost. China's foreign exchange reserves are mainly used to buy short-term bonds of the US government and interbank deposits of overseas financial institutions, and its return on assets is far lower than the interest paid by foreign loans and the cost paid by foreign direct investment. While holding a large number of low-yielding foreign exchange assets, China borrowed a large amount of foreign capital from the international financial market at high cost, which caused a huge waste of resources and paid a considerable price.
Second, bear the exchange rate risk. China's foreign exchange reserves are highly concentrated in the central bank, so the exchange rate risk brought by exchange rate changes cannot be dispersed to other microeconomic entities and must be borne by the central bank alone. Under the uncertainty of the current international monetary system and international financial market, the central bank holds huge foreign exchange reserves, especially US dollar reserve assets, which will face huge exchange rate risks.
(5) Increase social transaction costs. Mainly manifested in: First, under the compulsory foreign exchange settlement and sale system, it will inevitably increase the extra burden of enterprises and increase transaction costs, which will weaken the competitiveness of enterprises to some extent. Second, the audit of the authenticity of the transaction not only brings huge social management costs, but also means the decrease of efficiency and the increase of social costs; Third, under the system of foreign exchange settlement and sale, excessive foreign exchange demand is an important feature of the foreign exchange market, and a large number of administrative approvals generated by excessive foreign exchange demand are an important source of rent-seeking and corruption. This not only reduces the efficiency of the use of foreign exchange resources, resulting in efficiency losses, but also pays the regulatory costs. These will undoubtedly increase the social transaction cost and cause the net loss of social welfare.
After joining WTO, due to the expansion of foreign trade, the increase of foreign capital inflow, the large number of foreign banks and the increase of their business, the foreign exchange market has become increasingly active, and the pressure of RMB exchange rate marketization has gradually increased. With the above-mentioned important changes, the liquidity of China's capital has gradually increased, it is more and more difficult to stabilize the exchange rate, and the cost of foreign exchange control will be higher and higher. These changes will inevitably require the RMB exchange rate to accelerate the market-oriented reform and improve the RMB exchange rate formation mechanism.