Enhancing RMB Transparency for High-Quality Development and High-Standard Opening Up

The report to the 20th National Congress of the Communist Party of China stated, “To build a modern socialist country in all respects, we must, first and foremost, pursue high-quality development.” One of three key drivers of high-quality development is “raising total factor productivity,” which cannot be separated from high-standard opening up to the outside world. In this context, the exchange rate regime plays a significant role in improving macroeconomic governance and modernizing governance capabilities. A more standardized and transparent RMB exchange rate mechanism can serve as a guarantee for promoting high-quality development and high-standard opening up. It would also serve as a crucial lever for China to actively participate in global governance reforms, drive the globalization process, and enhance human well-being.

1. Transparent RMB Exchange Rate Mechanism Established Through Continuous Forex Reforms and Forex Market Development

The transparency of the market-based RMB exchange rate mechanism has notably improved, propelled by advancements in rule-based reforms and development in the forex market. The transition from a dual-track mechanism to a unified system in 1994, as well as reform policies promulgated on July 21, 2005 and August 11, 2015, served as  a milestone in China’s market-oriented forex reforms. Coupled with dynamic policy adjustments and the cultivation of market-oriented mechanisms, a clear, rule-based, transparent, open and market-responsive RMB central parity rate against the U.S. dollar has been established. This is evidenced in the following aspects.

Rule-based market and supply-demand-driven mechanism. Starting with exchange rate unification in 1994, which paved the way for a unified forex market, the RMB central parity rate mechanism has evolved consistently. After more than a decade of practice, the mechanism was improved in July 2005 when the managed floating exchange rate system was implemented based on market supply and demand and adjusted with reference to a basket of currencies. Subsequently, in 2015, the People’s Bank of China (PBC), the country’s central bank, introduced additional measures to enhance the market-based determination of the exchange rate, phasing out routine interventions in the forex market and thereby achieving a more refined mechanism.

Transparency in data disclosure and independent decision-making. The PBC regularly releases the reference exchange rate for the RMB against a basket of currencies while financial institutions provide real-time RMB information including exchange rate quotations, reference exchange rates, exchange rate formation mechanisms, and pertinent policies. This transparency empowers market participants and the public to comprehend the operational dynamics and fluctuations of the RMB’s exchange rates against other currencies.

Rule-based safeguards for transparent market operation. Recent years have seen the Chinese government enhance fairness and transparency in the forex market by establishing and strengthening robust supervision and monitoring mechanisms. These measures encompass refining macro-prudential and micro-regulatory management frameworks, enhancing non-site capacity building, and combating illicit forex activities. In accordance with the Regulations on the Foreign Exchange System of the People’s Republic of China, Law of the People’s Republic of China on Anti-Money Laundering and other legal instruments, various investigations, punishments, and criminal accountability have been implemented to combat relevant irregularities and violations, targeting manipulative and fraudulent actions. Bolstering forex monitoring and analysis, reinforcing macro-prudential administration and expectation guidance, and diversifying macro-prudential policy tools are also integral components.

Enhanced quality in international collaboration. China proactively engages in partnerships with other nations and international organizations to share experiences and information to elevate the transparency of the RMB exchange rate. Notably, the International Monetary Fund (IMF) added the RMB to its Special Drawing Rights (SDR) currency basket in October 2016, further advancing the internationalization and transparency of the RMB. Efforts also extend to enhancing the quality and standardization of statistical data in alignment with international norms such as following the IMF’s Special Data Dissemination Standard (SDDS) for disclosing forex market data. This enhances the comparability and transparency of the RMB.

2. Importance of Enhancing RMB Transparency for Facilitating High-Quality Development and High-Standard Opening Up

High-standard opening up means to “steadily expand institutional opening up with regard to rules, regulations, management, and standards.” Elevating RMB transparency advances the coordinated development of both internal and external aspects in China, with particular significance for achieving high-standard opening up. This has been manifested through the following perspectives.

Enhancing market confidence and stability. Accurate understanding of exchange rate formation and fluctuations empowers market participants to assess risks and make informed investment and trading decisions. A rule-based, transparent, and market-oriented RMB mechanism instills confidence and stability in market entities. For instance, market entities can swiftly adapt to enhanced RMB flexibility, adjust expectations, and maintain stability, considering that the RMB has exhibited strong resilience in the face of challenges such as the China-U.S. trade tensions, the COVID-19 pandemic, and global political and economic uncertainties.

Balancing security and development. A transparent exchange rate regime enables timely identification and response to potential financial risks. At the micro level, businesses and investors equipped with accurate, timely exchange rate information can better evaluate risks, make informed cross-border transactions, and manage risk effectively. Simultaneously, this promotes cross-border trade facilitation and capital flow while minimizing the financial system’s vulnerability. At the macro level, accurate assessment of RMB exchange rate fluctuations empowers China and its central bank to adjust monetary policies and macroeconomic regulation according to economic impacts, ensuring sustainable economic development.

Promoting global governance reform and upholding international reputation. A transparent RMB exchange rate formation mechanism can enhance China’s cooperation and communication with other nations and international organizations, augmenting the progress of financial openness and RMB internationalization. Moreover, in the context of the flaws in the U.S. dollar-based international monetary system and the reshaping of the international financial system, an increasingly transparent and credible RMB enhances China’s capacity for participating in the global governance reform. This helps elevate China’s international reputation and refute baseless allegations from the West.

3. A Transparent and Rule-Based RMB Exchange Rate Mechanism Promotes High-Quality Development and High-Standard Opening Up

Following a sequence of comprehensive and progressive reforms, China’s forex market has witnessed steady improvement. Notably, substantial advancements have been made in enhancing the transparency of the RMB exchange rate mechanism. However, some with ulterior motives tend to turn a blind eye to these advancements and sometimes even purposely denigrate the RMB’s transparency.

China’s forex market has undergone a gradual transformation, with market supply and demand playing an increasingly vital role in shaping the RMB exchange rate. As a matter of fact, RMB exchange rate fluctuations are predominantly influenced by market dynamics rather than government manipulation.

China has substantial forex reserves, enabling the PBC to maintain RMB exchange rate stability in the forex market, which in turn boosts investor confidence in the stability of the Chinese market. Guided by macro-prudential stability objectives, the PBC engages in market communication to mitigate significant fluctuations caused by irrational expectations, enhancing international confidence in the RMB.

The RMB exchange rate has been impacted by the global economic environment, international trade, and exchange rate differentials. So, attributing currency fluctuations to government manipulation is misguided.

The RMB exchange rate mechanism serves as a vital bridge connecting domestic and foreign real and financial sectors. The forex market represents a key arena for high-standard opening up. In recent years, the PBC has intensified international communication to bolster global understanding of RMB exchange rate transparency and highlight China’s forex market reform endeavors. This enhances international comprehension of China’s forex market rules and systems, fostering high-standard opening up while dispelling misconceptions about China’s exchange rate policies. Through strengthened cooperation with other countries and regions, the PBC is driving reform and improvement of the international monetary system, ensuring a fair and stable exchange rate environment. It has also intensified collaboration and information sharing with other countries, international organizations, and market regulatory institutions in the realm of the forex market, collectively advancing transparency and stability in the global forex market.

 The author is a special researcher at the Beijing Research Center of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era and vice president of the Central University of Finance and Economics.