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Taking the opportunity to improve the yuan exchange rate formation mechanism


By Xu Wei, mid-long-term growth team, Development Research Center of the State Council (DRC)

Report No 68, 2014 (Total No 4567)


The floating rate of the yuan against the dollar on interbank spot foreign exchange market widened from 1 to 2 percent, in early 2014, and with China's relatively slow growth at the beginning of this year, the exchange rate was lower than that at the end of 2013. The exchange rate trend and international balance of payments show that the yuan exchange rate has leveled for a short-term and, from the long-term perspective on labor productivity, the exchange rate fits China's current economic development.

This study suggests that the country should use this opportunity and learn from the reforms in countries that are catching up with the developed economies and, at the same time, relax the yuan exchange rate, stop interventions in foreign exchanges, encourage other trading products and practices, and involve more participants in foreign markets. It should also remove implicit guarantees, strengthen controls, and improve the economic agents' ability to handle pricing and risk controls.