By Li Jianwei, Research Department of Social Development, DRC and Yang Lin, China Life Insurance Group

Research Report, Special Issue, No.1, 2017 (Total 1525) 2017-01-19

Abstract: In the course of the reform on RMB exchange rate formation mechanism from being pegged to the US dollar to being pegged to a basket of currencies and adopting a regulatory floating exchange rate mechanism, the effective exchange rate of RMB was largely appreciated for a time, making RMB exchange rate overvalued. After the exchange rate reform on August 11, 2015, the RMB effective exchange rate was continuously depreciated, directly caused by the expanded scale of net capital flight due to hot money outflow in large quantities. This actually served as an appropriate adjustment to the previous overvaluation of RMB exchange rate. In the future, the effective RMB exchange rate will have limited space for further depreciation, as the overvaluation of RMB against the US dollar has been fully fleshed out. Yet RMB still has relatively large depreciation space for Euro, Japanese yen and currencies of neighboring countries. China needs to further improve the mechanism for formulating and regulating RMB exchange rate so as to keep the effective RMB exchange rate stable at a reasonable and equilibrium level.

Key words: RMB exchange rate, influencing factors, development momentum