What Is China's Exchange Rate Policy and How Does It Affect Global Markets?

What exactly is China's exchange rate system like? Many people have the impression that the renminbi (RMB) does not seem to float freely like the US dollar, nor is it fixed at a fixed exchange rate. In fact, China adopts a “managed floating exchange rate system”, which means that while maintaining a certain degree of flexibility, the central bank (usually the People's Bank of China) guides or intervenes through various means to allow the RMB to float within a reasonable range. In other words, it will neither “let things take their own course” nor “lock it in place”.

So how does this exchange rate framework affect the domestic and international economies? Scroll down to find out.

What does “managed floating” actually manage?

In the international financial market, a huge number of traders and institutions buy or sell the renminbi every day. In the face of these large and small capital flows, the central bank will determine a daily reference exchange rate based on economic fundamentals, market supply and demand, the international situation and other factors. If the market fluctuates too much in the short term, the central bank may intervene in the foreign exchange market or adjust policy instruments to “correct” the exchange rate in the direction it wants it to go. This process is simply a “visible hand” fine-tuning behind the scenes to ensure that the exchange rate can keep up with global economic changes without being disrupted by excessive speculation.

The intertwining of policy and market

• Policy regulation: Macro-control is the main theme, such as lowering interest rates, adjusting foreign exchange reserves, formulating financial supervision policies, etc.
  
• Market sentiment: trade frictions, the political environment, international capital flows... all of these can instantly affect the direction of the RMB exchange rate.
• Economic fundamentals: including GDP growth, inflation rates, export data, etc., are all important indicators that the central bank refers to.
• Opening up process: with the continuous opening up of China's capital market, the demand for RMB assets from overseas funds will become more and more obvious, thus affecting the exchange rate trend.

Why is the future still uncertain?

The international situation will not remain unchanged. Sino-US relations, geopolitical changes, and fluctuations in the global economic cycle are likely to bring new uncertainties. In the face of these external shocks, China may pay more attention to the balance between exchange rate stability and economic security.

As the internationalization of the renminbi progresses, more central banks and institutions will include the renminbi in their foreign exchange reserves, and the market demand structure will also change. The combination of these factors means that the renminbi exchange rate in the future may become more “international”, and it will also be “protected” by policy at critical moments.

The pace of liberalization and institutional guardrails

Looking ahead, China is likely to continue optimizing its foreign exchange management system, giving the market more pricing power while maintaining the space for intervention when necessary. Technically speaking, the digital RMB may also have a profound impact on global capital flows and settlement methods. Just like driving on the highway, everyone likes freedom, but safety barriers are also essential. The management of the RMB exchange rate is also a strategy of “development and stability”.

In general, China's exchange rate type can be summarized as “managed floating”, which emphasizes the decisive role of the market in resource allocation, while also allowing for moderate policy-driven regulation at critical times. Its existence is closely related to China's huge economic volume and complex global environment, and to some extent reflects the government's desire to balance openness and stability. To gain a deeper understanding of its future direction, we must also pay attention to the broader economic environment, the evolution of international relations, and the ever-innovative means of financial technology. After all, behind the exchange rate, there is always more than just a simple rise or fall in numbers, but also the development path of a country that seeks progress while maintaining stability.