On the reform of RMB exchange rate: A middle ground solution

Just one year after the global financial crisis, the RMB exchange rate is under pressure to appreciate once again. For one thing, the domestic structural problems in the Chinese economy which are related to RMB exchange rate have not yet been solved; for another, expectation for RMB appreciation and speculative inflows of capital returns to China. The reform of the RMB exchange rate regime seems both necessary and inevitable. In this chapter we try to achieve three goals: (1) to provide a systematic evaluation of the current de facto dollar peg regime; (2) to evaluate the benefits and shortcomings of four different reform schemes on RMB exchange regime which are popular in debate on this issue; (3) to propose a middle ground solution to the reform of RMB exchange rate regime, which is capable of giving considerations to both macroeconomic stability and rebalancing of resource allocation between tradable and nontradable sectors. The middle ground solution includes: a one time 10% RMB appreciation against the US dollar accompanied by annual ±3% band against the US dollar. Now is a very good time for implementing the middle ground solution to the RMB exchange rate reform.