Policy Forum 14 (June 2021)
China's external policy features exchange rate targets, capital controls and sterilized interventions. Although constrained by a strictly managed exchange rate, China's monetary policy can maintain considerable independence owing to capital control and sterilization measures. China's external policy features exchange rate targets, capital controls and sterilized interventions. Although constrained by a strictly managed exchange rate, China's monetary policy can maintain considerable independence owing to capital control and sterilization measures.
According to the official announcement in 1994, China established a managed floating exchange rate system based on market supply and demand. But the CNY exchange rate system was never a managed float in its true sense. The authority maintained tight control over the exchange rate and effectively pegged its currency to the U.S. dollar in the following decade. A new round of reform started in 2005, when China moved away from the fixed exchange rate regime and the CNY was allowed to crawl higher. However, this appreciation process stopped after the financial crisis in 2007, and the Chinese Yuan was re-pegged to the U.S. dollar. Again, since the second half of 2010, the CNY has become more flexible, with a gradually expanded fluctuation range centering around 1: 6.5.