China’s Currency Regime: 2005-2009

The recent changes in the Chinese currency regime are examined by proposing, that due to a misunderstanding, the Chinese government was assumed to be adopting a currency basket, when their announced intention was really a period of “experimentation” that is intended to eventually lead to a managed float regime for the Yuan/renminbi (RMB), tempered by maintaining a certain purchasing power for the RMB. Using new structural breakpoint analysis developed by Qu and Perron (2007) , and robust regression analysis, confirms that there have been six distinct eras of currency policy for the RMB since July of 2005, including reference versus the US dollar, Japanese yen, and the euro that have featured flexible weightings over time. The true regime seems to be one of a currency policy that attempts to balance a more flexible currency with a need to maintain a certain degree of purchasing power and price stability.