(Source: People’s Bank of China) The China Foreign Exchange
Trade System (also known as CFETS) has published CFETS exchange rate index on
its website on December 11th. This will help bring about a shift in how the public
and the market observe RMB exchange rate movements.
For quite long, market participants have used bilateral
exchange rate of RMB against USD to assess RMB exchange rate movements.
However, as fluctuations of exchange rate serve to adjust trade and investment
activities with multiple trading partners, the bilateral RMB-USD exchange rate
is not considered a good indicator of the international parity of tradable
goods. Therefore, it is more desirable to refer to both the bilateral RMB-USD
exchange rate and exchange rate based on a basket of currencies. The effective
exchange rate index, on a weighted average basis, describes the relative
strength of a country’s currency against a basket of foreign currencies, and
reflects the overall value change of that currency. Compared with referring
only to one currency, a basket of currencies can better capture the
competitiveness of a country's goods and services, and better enable the
exchange rate to adjust import, export, investment activities and the balance of
payments position. The publication of CFETS exchange rate index provides
quantitative indicators for market participants to observe the RMB exchange
rate movements, and offers a more comprehensive and accurate way to assess
market conditions.
Looking at international experiences, the Federal Reserve,
the European Central Bank and the Bank of England all publish their
own exchange rate indices, while intermediate institutions also publishes
their indices. For example, the U.S. Dollar Index released by the
Intercontinental Exchange (ICE) has become a major index in the international
market. Therefore, it is consistent with international practice that CFETS
publishes its RMB exchange rate index. Since the beginning of 2015, the trend
of this index has been relatively stable. The index is 102.93 on November 30th,
appreciated 2.93% from the end of 2014. This shows that, even though RMB has
depreciated against USD since the beginning of this year, it has appreciated
modestly against a basket of currencies. Therefore, RMB is relatively a strong
currency among the major international currencies.
The CFETS will regularly publish the RMB exchange rate
index. This will help guide market participants to shift their focus from the
bilateral RMB/USD exchange rate to the effective exchange rate, which is based
on a basket of currencies, in their efforts to observe exchange rate movements.
This will contribute to maintaining the RMB exchange rate basically stable at
an adaptive and equilibrium level.
In order to provide more reference points, CFETS will also
publish RMB exchange rate indices based on the SDR currency basket and the BIS
currency basket respectively. By the end of November 2015, the above two
indices had appreciated 3.50% and 1.56% respectively since the end of 2014.
