Core Viewpoint - The article discusses the evolution and future prospects of China's currency exchange rate reform, emphasizing the importance of marketization in the exchange rate system and the need to overcome "floating fear" to achieve a fully market-oriented exchange rate [1][18]. Summary by Sections Exchange Rate Reform Background - On August 11, 2015, the People's Bank of China announced improvements to the RMB/USD exchange rate quotation mechanism to enhance marketization [2]. - The initial phase of the reform faced significant challenges, including capital outflows and a decline in foreign reserves, leading to a depreciation of the RMB [2]. - By the end of 2016, the RMB exchange rate had fallen to around 7, with foreign reserves nearing a critical level of $3 trillion [2]. Marketization as a Key Theme - Marketization is identified as the main thread of the exchange rate reform, with the consensus that the mechanism is more important than the level of the exchange rate itself [3][4]. - The reform is seen as a continuation of the market-oriented exchange rate formation mechanism established since the 1994 exchange rate reform [4]. Historical Context of Exchange Rate Mechanism - Prior to the 1994 reform, China had a dual exchange rate system, which transitioned to a managed floating exchange rate system [5][6]. - The exchange rate reform in 1994 was not solely about depreciation but was also influenced by broader financial reforms, including the introduction of an export tax rebate system [5]. Exchange Rate Trends and Performance - Since the 1994 reform, the RMB has appreciated significantly against major currencies, with a nominal appreciation of 21.5% by July 2025 compared to early 1994 [7]. - The RMB's nominal effective exchange rate (NEER) and real effective exchange rate (REER) have also shown substantial appreciation, ranking high among 57 currencies [7]. Equilibrium Exchange Rate Concept - The concept of an equilibrium exchange rate is discussed, indicating that it is difficult to define and measure accurately [9]. - Historical examples illustrate that the RMB has often defied expectations regarding its valuation, such as during the 1994 and 2005 reforms [10]. Current Exchange Rate Dynamics - Recent trends show that the RMB's REER has depreciated, raising questions about whether it is undervalued or overvalued based on trade surpluses and domestic economic conditions [11]. - The International Monetary Fund (IMF) has identified the RMB as one of the currencies that is stronger than its fundamental equilibrium level [12]. Future Outlook and Challenges - The article emphasizes that the marketization of the RMB exchange rate is still ongoing, with increasing awareness of exchange rate risks and the need for further reforms [18]. - The flexibility of the exchange rate policy has improved, allowing it to act as a buffer against internal and external shocks, but it also faces challenges from market sentiment and potential over-adjustments [17].

Core Viewpoint - The article discusses the evolution of China's exchange rate system since the 1994 reform, emphasizing the importance of market-driven mechanisms and the gradual move towards a more market-oriented exchange rate for the Renminbi (RMB) [1][2][12]. Summary by Sections Exchange Rate Reform History - The 1994 exchange rate reform established a managed floating exchange rate system, transitioning from a dual exchange rate system to a unified market-based rate [2][3]. - The initial phase of the reform faced significant challenges, including capital outflows and a decline in foreign reserves, leading to a depreciation of the RMB [2][3]. - By 2017, the introduction of a counter-cyclical adjustment factor improved the exchange rate mechanism, allowing for a more accurate reflection of economic fundamentals [2][3]. Market Dynamics and Currency Valuation - Since the 1994 reform, China's foreign exchange reserves have increased significantly, reaching $32,407 billion by March 2025, with a net increase driven primarily by trading activities [4]. - The RMB has appreciated against both bilateral and multilateral currencies, with a nominal effective exchange rate (NEER) increase of 64.2% since 1994 [4]. - The International Monetary Fund (IMF) has identified the RMB as one of the currencies that is stronger than its fundamental equilibrium exchange rate level [8]. Current Exchange Rate Challenges - The article highlights the ongoing challenges in achieving a balanced exchange rate, noting that market perceptions can lead to significant deviations from economic fundamentals [9][10]. - Recent trends indicate a potential undervaluation of the RMB despite a growing trade surplus, suggesting a complex interplay between domestic economic conditions and external pressures [7][12]. - The central bank has emphasized the need for stability in the RMB exchange rate, particularly in response to market fluctuations and external economic conditions [12][13]. Future Outlook - The article concludes that while significant progress has been made towards a market-oriented exchange rate, further efforts are needed to overcome the "fear of floating" and fully realize a market-driven exchange rate system [1][13].

Core Viewpoint - The article discusses the evolution of China's currency exchange rate system, emphasizing the importance of marketization in the reform process and the challenges that remain in achieving a fully market-driven exchange rate [1][2][14]. Group 1: Historical Context of Exchange Rate Reform - The "8·11" exchange rate reform initiated a shift towards a more market-oriented exchange rate mechanism, building on previous reforms since 1994 [2][3]. - Prior to the 1994 reform, China had a dual exchange rate system, which transitioned to a managed floating exchange rate system [2][3]. - The initial phase of the "8·11" reform faced significant capital outflows and a decline in foreign reserves, leading to a depreciation of the RMB [1][4]. Group 2: Exchange Rate Mechanism and Market Dynamics - The exchange rate mechanism has evolved to include a counter-cyclical adjustment factor to better reflect economic fundamentals and prevent market herd behavior [1][4]. - By 2019, the RMB broke the 7 mark against the USD, indicating a further increase in the marketization of the exchange rate [1][4]. - The overall foreign exchange reserves increased significantly from 1994 to 2025, indicating a net increase driven by market activities [4]. Group 3: Current Exchange Rate Challenges - The concept of equilibrium exchange rate is complex, with the market often deviating from economic fundamentals, leading to potential overvaluation or undervaluation of the RMB [5][10]. - Recent trends show that despite a growing trade surplus, the RMB's real effective exchange rate (REER) has depreciated, suggesting a potential misalignment with economic fundamentals [7][8]. - The International Monetary Fund (IMF) has identified the RMB as one of the currencies that is stronger than its fundamental equilibrium level, indicating ongoing discussions about its valuation [9]. Group 4: Future Outlook and Policy Considerations - The article highlights the need for continued efforts to overcome "floating fear" and achieve a fully market-driven exchange rate system [14]. - The flexibility of the RMB exchange rate policy has been enhanced, allowing it to absorb external shocks and providing more autonomy for monetary policy [12][13]. - However, the central bank has emphasized the importance of maintaining stability in the exchange rate to prevent excessive fluctuations driven by market sentiment [13][14].