Background to the Chinese Renminbi

Hai Xin

2.1 INTRODUCTION

Sometimes, when discussing the renminbi exchange rate, people confuse the flexibility of the currency with its convertibility. These are two different concepts.

A flexible or floating exchange rate usually means it moves up and down freely and its level is set by market forces. Its opposite would be a fixed, or pegged, exchange rate. Between 100% floating and 100% fixed there exist many different kinds of managed floating exchange-rate arrangements. As of the end of 2011, the renminbi exchange rate against the US dollar was officially known as the “managed float”. Many researchers and journalists use terms such as “crawling peg”, “semi-fixed” and “basket peg” to describe it. The official description from SAFE on its website since 2005 has been “a managed floating exchange rate system based on the market supply and demand, adjusted with reference to a basket of currencies”. We will see later in this chapter that market supply and demand began to play an increasingly important but still very limited role in the renminbi’s price formation up to the end of 2011.

On the other hand, a convertible currency means that you can buy and sell the currency against