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RMB Exchange Rate Regime Reform and the Trilemma Faced by China as a Large Open Economy

Feng Ming;National Academy of Economic Strategy, CASS;  
The discussion on the RMB exchange rate movement cannot depart from the ongoing reform of the RMB Exchange Rate Regime, while the latter should be designed and promoted within the macro policy framework of a Large Open Economy(LOE). As a LOE facing"Trilemma", China should take monetary autonomy as the primary objective, which the exchange rate policy and capital account policy should obey rather than violate. Contrary to this principle, pegging to the USD makes RMB exchange rate lack fl exibility. Especially under the current circumstance when major countries are facing unsynchronized economic cycles and the Fed expectsto tighten its monetary policy, pegging to the USD makes the RMB real effective exchange rate move passively along with the USD, failing to refl ect the relative changes in economic fundamentals at home and abroad. This produces distortion, leads to misallocation, and results in welfare loss. The reform of the RMB Exchange Rate Regime should be market oriented, towards a direction with more fl exibility.
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