Choice of RMB appreciation speed and amplitude

Abstract

Purpose

The purpose of this paper is to analyse the implications of exchange rate fluctuations on China's national macro‐financial stability and evaluate current renminbi (RMB) appreciation speed and magnitude.

Design/methodology/approach

The contingent claims analysis method is used to construct the financial risk indicator and evaluate the macro‐financial risk. The paper also implemented computer simulations to generate different scenarios in the macro‐scenario analysis.

Findings

The main conclusion is that there is claims‐based currency mismatch in China's four major economic sectors. The simulation results show that faster appreciation leads to wide fluctuations on asset prices, the size of the base currency and foreign debt in China. In the current risk level, steady speed appreciation style is better than the accelerated appreciation style.

Social implications

The results of this paper imply that current appreciation speed and magnitude are favorable to control macro‐financial risks within safe status, but China needs to promote the reform of RMB exchange rate formation mechanism in the future.

Originality/value

The paper is of historical value in applying the contingent claims analysis method to analyse the implications of exchange rate fluctuations. It provides a new way to measure whether the exchange rate is reasonable.

Citation

Ye, Y. and Chen, B. (2012), "Choice of RMB appreciation speed and amplitude", Kybernetes, Vol. 41 No. 10, pp. 1546-1556. https://doi.org/10.1108/03684921211276738