Chinese Central Bank Outlines Plan To Ditch The Dollar As The Yuan’s Peg
Vincent Fernando, CFA
Jul. 23, 2010
Hu Xiaolian, deputy governor at the Chinese central bank, has released a paper which suggests it’s soon time for China to peg the yuan to a basket of foreign currencies, rather than the U.S. dollar alone.
This especially makes sense for China given that, going forward, the U.S. might not the voracious consumer it once was. Thus tying itself at the hip to the dollar might not be as useful as it was before.
Compared with pegging to a single currency, the exchange rate regime with reference to a basket of currencies will help adjust exports and imports, current account, and balance of payment in a more effective manner. It has two-way movements of exchange rate. The RMB exchange rate has been basically stable at an adaptive and balanced level though it may fluctuate in both ways against any particular single currency.
Since the RMB exchange rate regime reform that started in 2005, the focus of public communications has been the RMB exchange rate regime with reference to a basket of currencies. But the mindset of focusing too much attention on RMB/USD exchange rate cannot be changed overnight due to behavioral habits and the dominant use of US dollar in accounting and statistics. This underpins the necessity for China to make more efforts to improve the exchange rate regime based on market supply and demand (mainly through the current account and especially the trade account balances) with reference to a basket of currencies. In the future, consideration can be given to disclosure of the nominal effective exchange rate information on a regular basis and to gradually shift the public´s attention on RMB/USD exchange rate to the effective exchange rate of RMB, which is the true reference for its movement.