China's Central Bank to Enhance Renminbi Exchange Rate Flexibility

China's central bank, the People's Bank of China (PBOC), has decided to proceed with the reform of the Renminbi (RMB) exchange rate regime to enhance its flexibility. This decision aims to reflect market supply and demand, with reference to a basket of currencies. The move is seen as a response to the country's economic situation and financial market developments at home and abroad, as well as the balance of payments (BOP) situation.

Key Takeaways:

• The PBOC will continue to emphasize the market's role in determining the RMB exchange rate, reflecting supply and demand with reference to a basket of currencies.
• The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.
• China's external trade is becoming more balanced, with the ratio of current account surplus to GDP declining since 2010.
• The BOP account is moving closer to equilibrium, reducing the basis for large-scale appreciation of the RMB exchange rate.
• The reform of the RMB exchange rate regime has been making steady progress since 2005, producing anticipated results and playing a positive role in mitigating the impact of the international financial crisis.

The BOP account's movement towards equilibrium and the decline in the current account surplus to GDP ratio demonstrate China's efforts to promote global rebalancing and maintain macroeconomic and financial stability. The country's stability, as evidenced by the RMB exchange rate, has played a crucial role in mitigating the impact of the crisis and contributing to global recovery.