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The Research on RMB Exchange Rate Formation Mechanism from the Perspective of Foreign Exchange Market Microstructure

With the increasing interdependence of world economies,the RMB exchange rate mechanism becomes the focus of attention at home and abroad.. Exchange rate has become an important economic variable affecting stability of a country
Submitted On: 04-01-2010 | Views:	Article Tools:

With the increasing interdependence of world economies,the RMB exchange rate mechanism becomes the focus of attention at home and abroad.. Exchange rate has become an important economic variable affecting stability of a country's economy. Exchange rate regime as an important component of a country's economic system plays a very important role in the country's economic growth and stability. Chinese government adheres to the principles of initiative,controllability and gradualness for the reform of RMB exchange rate formation mechanism. Since July 21,2005,China began to implement a regulated,managed floating exchange rate system based on market supply and demand and in reference to a package of currencies. RMB exchange rate will no longer be pegged to the single US doll but establishes a mechanism with better flexibility.Foreign exchange market microstructure is the area of finance that focuses on the trade process of Foreign exchange market, which departs from the analysis of macroeconomic fundamentals determinants. The study is a great breakthrough in the exchange rate theory. After the reform, market microstructure is evolving in the marketization direction, laying the foundation for marketable RMB exchange rate. RMB forward exchange rate formation is not only the inevitable requirement of the RMB exchange rate, but also reflects the differences of RMB exchange rate formation mechanism between before and after the reform.In this paper, firstly studies the theoretical study of exchange rate formation mechanism based on the market microstructure theory. The theory goes through an evolution process. Then dominatingly the paper dominatingly compares the differences of RMB exchange rate formation mechanism and its market microstructure between before and after RMB exchange rate regime reform on July 21, 2005.On the ground of these analyzes, the paper quantitatively testifies the market performance and central bank intervention in China's foreign exchange market.Finally, the paper puts forward some political and technological suggestions for the improvements of RMB exchange rate formation mechanism based on China's foreign exchange market.

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