The Chinese exchange rate regime

Comments on Yu Yongding, CASS “Backpedalling or a step forward in renminbi reform?” 20-22/07/2017

There are a few interesting points arose from this post. Firstly, it is a case of whether one views that as "half bottle empty" or "half bottle full" as far as the case of the equal weights being given to both previous day's close and the ‘theoretical RMB exchange rate’ in setting the renminbi central parity rate against the US dollar, although the author appears to be taking on the side of half bottle empty and possibly more negative than that. Yes, there might be a question of whether it is worthy to do such the way may be a little fiddling, but any negatives could also be viewed as positively through the lens of half empty to half full analogue.

Secondly, while free exchange may be viewed as a market way to sort out the exchange rate and may be a preferred way, it is by no means free of problems and often big and significant problems. For example, there can be big swings in the exchange rate that are exacerbated by speculative traders. Just as assets bubbles can arise and cause or have the potential to cause huge damages to the economy, bubbles can also arise in the foreign exchange markets. That is not to mention the so called overshooting phenomemon.

Maybe a simple question should be asked: why should a nation or nations suffer/incur the costs because of exchange bubbles caused by currency speculators?

It seems there is a point to have a stable exchange rate regime, given the role exchange rate plays as the relative prices of one country's goods and services as well as capital against another country, and particularly the tendency of instability of the foreign exchange market in light of speculative trading (as opposed to the real needs to buy foreign currency).

Governments would have greater difficulty in management/regulate asset prices even they would like to (some governments may not want to). On the other hand, it may be a little easier for governments to manage/regulate foreign exchange rate.

I think there is a case for economists to revisit the case of free versus fixed exchange rate regimes, or a combination of the two, even though the author appears to be in favour of a free exchange rate regime.

Any fixed exchange rate regime also needs some appropriate adjustment mechanisms to achieve longer term balance.