Why is it to refer to a basket of currencies instead of a basket of currencies

Why "reference basket" instead of "pegging basket"? After the reform of the RMB exchange rate formation mechanism, the RMB exchange rate is no longer pegged to a single US dollar, but according to the actual situation of China's foreign economic development, a number of major currencies are selected, and corresponding weights are given to form a currency basket. At the same time, according to the economic and financial situation at home and abroad, on the basis of market supply and demand, and with reference to a basket of currencies to calculate the changes in the RMB multilateral exchange rate index, the RMB exchange rate is managed and regulated, so as to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

Referring to a basket of currencies indicates that exchange rate changes between foreign currencies will affect the RMB exchange rate, but referring to a basket of currencies is not equivalent to pegging to a basket of currencies, it also needs to take market supply and demand as another important basis, so as to form a managed floating exchange rate. Pegging to a basket of currencies is to mechanically adjust the exchange rate of the renminbi against the US dollar according to the changes in the exchange rate index of the basket currencies, so as to achieve a nominal effective exchange rate unchanged.

Compared with the exchange rate system that is pegged to the US dollar alone, it can more comprehensively reflect the changes of the renminbi against major currencies, which is conducive to better coping with the impact of the instability of the US dollar, reducing the fluctuation of the multilateral exchange rate of the renminbi, and maintaining the overall stability of China's foreign economic and trade environment, thereby promoting the basic balance of payments and the sustained, coordinated, healthy, and relatively rapid development of the national economy. The contents of the current reform of the RMB exchange rate formation mechanism with reference to a basket of currencies for adjustment have met the needs of the diversification of China's foreign economic and trade relations and the diversification of the development trend of the international economic and financial system.

The so-called reference basket of currencies refers to a certain country according to the degree of closeness with investment, select several major currencies, set different weights for different currencies to form a basket of currencies, set a floating range, and the country's currency will float according to this basket of currencies and within the range.

On the other hand, China's domestic economic development will not be greatly affected by the stability of the real effective exchange rate. From the perspective of the international financial market, the appreciation of the US dollar will cause a reduction in global monetary liquidity, which will have a great impact on some emerging economies, and may even lead to a financial crisis. Not only that, the continued strength of the US dollar will put pressure on the inflation rate of the US dollar, which will have a relatively large impact on the growth of the US economy.

There are about five exchange rate regimes in force in the world, including the "dollarization" system, in which the currencies of other countries are used as the national legal compensation currency; a "linked exchange rate system" that maintains a fixed exchange relationship between the national currency and a major international currency; The "Adjustable Linked Exchange Rate System" pegged to a specific currency or basket of currencies and the periodic review of changes in the domestic and international economic and financial situation and the reformulation of fixed exchange rate targets; a "managed floating exchange rate system" in which the central bank can intervene appropriately; and the "fully floating exchange rate system" for the yen, the U.S. dollar, and eurozone currencies.

1. Basket of currencies refers to a foreign currency combination that is used as a reference for setting the exchange rate, and the proportion of a foreign currency in the portfolio is usually based on the importance of the foreign currency in the international market of the country, and is a group of currencies composed of a variety of currencies according to a certain proportion.

2. For example, if 40% of a country's imports and exports are denominated in US dollars, the US dollar may be 40% of the country's peered basket of currencies.

A basket of currencies in layman's terms

1.A basket of currencies refers to a set of foreign currency references. The proportion of a foreign currency in a combination often depends on the importance of the foreign currency in the country's international community. It is a group of currencies that are made up of multiple currencies in a certain proportion.

2.For example, if 40% of a country's imports and exports are denominated in US dollars, then the US dollar may have a 40% weight in that country's basket of goods.

A basket of currencies refers to a set of foreign currencies as a reference for setting the exchange rate, and the weight of a foreign currency in the portfolio is usually based on the importance of the foreign currency in the country's international **, and is a group of currencies composed of multiple currencies according to a certain proportion.

On November 27, 2016, Yi Gang, deputy governor of the People's Bank of China, expressed his stance on the RMB exchange rate, saying that the RMB still shows the characteristics of a stable and strong currency in the global monetary system.

Currency basket, for example, this basket is composed of three currencies, there are US dollars, euros and Japanese yen, there are 1 US dollar, euro, 50 yen in the basket, suppose there is a base exchange rate: 1 US dollar to 10 yuan, 1 US dollar to 1 euro, 1 US dollar to 100 yen, then this currency basket is worth 2 US dollars, or 2 euros, or 200 yen, or 20 yuan, which are all equivalent. Of course, this is fiction.

The meaning of pegging the renminbi to a basket of currencies is to keep the value of this basket unchanged at 20 yuan.

A fictitious basket of currencies:

1 USD + EUR + 50 JPY.

2 USD. $1).

USD) USD)).

2 euros 200 yen.

20 RMB.

Now suppose the dollar depreciates, and the exchange rate of the dollar becomes 1 dollar against the euro, and 1 dollar against 80 yen, then the value of the currency basket will change (see box 2), because the dollar value of the euro and the yen has increased, the euro is worth the dollar, and 50 yen is also equivalent to the dollar, and the value of the entire currency basket is the dollar, and if the exchange rate between the yuan and the dollar is kept unchanged, the value of the currency basket in yuan is the yuan. In this way, the renminbi is not pegged to a basket of currencies, because the value of the basket has changed. At this time, in order to keep the value of the basket of RMB 20 unchanged, the exchange rate between the RMB and the US dollar must be adjusted, to what extent?

It must be adjusted to 1 US dollar to RMB only, so that the value of the basket is still 20 RMB. Before the depreciation of the dollar, it was 1 dollar to 10 yuan, so now the yuan has appreciated. Since the U.S. dollar depreciates against the euro and the yen, in order for the value of the renminbi to be pegged to a basket of currencies unchanged, the renminbi must appreciate against the U.S. dollar and become 1 U.S. dollar against the renminbi.

A basket of currencies refers to a combination of foreign currencies as a reference for setting the exchange rate, and the proportion of a foreign currency in the portfolio is usually based on the importance of the foreign currency in the country's international **, and is a group of currencies composed of a number of currencies according to a certain proportion. For example, if 40% of a country's imports and exports are denominated in US dollars, the US dollar may be 40% of the country's basket of currencies.

At present, the United States, the euro area, Japan, South Korea, etc. are China's most important partners, and correspondingly, the US dollar, the euro, the yen, and the South Korean won will naturally become the main basket currencies. Since Singapore, the United Kingdom, Malaysia, Russia, Australia, Thailand, Canada and other countries also have a large proportion of China, their currencies are also very important to the RMB exchange rate.

The balance of goods and services constitutes the vast majority of China's current account balance, so the determination of the basket currency is also based on the weight of foreign countries, the United States, the euro area, Japan, South Korea, etc. are currently China's most important partners, correspondingly, the dollar, the euro, the yen, the Korean won, etc. will naturally become the main basket of currencies.