Abstract

China announced to adopt managed floating exchange rate regime with reference to a basket of currencies in July 2005, but did not unveil exact weight of each of component currencies in RMB basket. We attempt to find the latest evidence on how the RMB pegs to its currency basket. This research begins with a short review of the evolutionary history of the RMB exchange rate regime in different periods from 1949 to 2013. We then move forward to examine how the RMB pegs to its currency basket and estimate the weight of each of component currencies over the period from January 2007 to March 2013 by applying Frankel and Wei (1994)’s model. The results illustrate that the RMB did not perfectly peg to RMB basket as the PBoC announced during the period from January 2007 to March 2013. But we find the US dollar’s weight has declined steadily since 2011, although it still is the most important reference currency to peg for the RMB. Interestingly, other currencies like Singapore dollar received increasing weight in RMB basket. It implies that RMB exchange rate regime is in the transitional period from single currency peg to currency basket peg.

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