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].

Core Viewpoint - The article discusses the opportunities and challenges for the internationalization of the Renminbi (RMB), emphasizing the need for a more market-oriented floating exchange rate system and the potential for RMB to become a more significant international currency amidst the declining credibility of the US dollar [1][4]. Group 1: Opportunities for RMB Internationalization - Since the pilot program for cross-border trade settlement in RMB began in 2009, the currency has transitioned from "non-internationalization" to "internationalization," becoming the third-largest currency in the International Monetary Fund's Special Drawing Rights (SDR) [1]. - As of December 2024, RMB accounts for 6.0% of cross-border trade financing, closely trailing the euro at 6.5%, but significantly lower than the US dollar's 81.9% [2]. - The RMB is the fourth-largest international payment currency, with a share of 3.8%, again lower than the dollar and euro, which hold 50.2% and 22.0%, respectively [2]. Group 2: Challenges for RMB Internationalization - The RMB's share in foreign exchange reserves was 2.2% at the end of 2024, down 0.7 percentage points from its historical high in early 2022, indicating a significant gap compared to the dollar and euro [2]. - The RMB is not yet fully convertible, and its exchange rate remains influenced by concerns over domestic financial stability and export competitiveness, complicating the process of capital account opening [9]. - The ongoing geopolitical tensions and trade conflicts, particularly with the US, pose additional risks to the RMB's internationalization efforts, potentially leading to a reconfiguration of global supply chains [8][9]. Group 3: Strategic Recommendations for RMB Internationalization - To enhance the RMB's international status, it is crucial to implement proactive economic policies and deepen reforms that stimulate market vitality and improve the investment environment for foreign investors [10]. - Strengthening financial market infrastructure and aligning domestic regulations with international standards will facilitate greater foreign participation in RMB-denominated assets [11][12]. - Accelerating the construction of Shanghai as an international financial center will support the RMB's internationalization by enhancing its competitiveness and service capabilities in global markets [14].