Since the unification of its exchange rates in 1994,China has employed a managed floating exchange rate mechanism that is based on supply and demand. On August 11,2015,a new pricing mechanism was put in place to set the mid-rate (also known as the parity rate) for the renminbi against the US dollar. This was aimed at creating a more market-based exchange rate. The exchange rate reform has now been in place for over a year,achieving the preliminary goal of attaining a more market-driven mid-rate. The renminbi trades around that daily mid-rate and which guards against shocks from big movements of capital. However,the effort to make the renminbi exchange rate fully market-driven is still a work in progress and deeper reforms are needed.

Major Outcome of 2015 Forex Reform

The reform introduced on August 11,2015 stated that the mid or parity rate set each day between the renminbi and the US dollar would take the closing exchange rate of the previous trading day as a "reference." The market rate trades around that mid-rate,reflecting changes in supply and demand,but within a limited band.

On December 11,2015,the renminbi exchange rate index was unveiled by the China Foreign Exchange Trading System. It measured the renminbi against a basket of currencies and was designed to serve as a benchmark to help maintain a stable exchange rate between the renminbi and this group of currencies. In February of this year,based on discussions with 14 market makers,the central bank launched the pricing mechanism which is now in effect. The mid-rate between the renminbi and the US dollar would be determined by using the closing market price of the previous trading day and the change in the exchange rate against the basket of currencies as well. According to banking sources,under the new pricing mechanism,the gap between the mid-rate and the average quotes from banks participating in the interbank market has narrowed,showing further progress in achieving market-based pricing as well as transparency. Under present conditions,this pricing mechanism is focused on the goal of stabilizing market expectations and increasing exchange rate flexibility,guarding against risks while promoting reform.