Working Paper

Pegging the Renminbi to a Basket - Facts, Prospects and Consequences

Heikki Oksanen
CESifo, Munich, 2010

CESifo Working Paper No. 3254

On 19 June 2010 the Chinese authorities announced that the renminbi (RMB) was henceforth to be pegged to a currency basket. Yet, it has quite closely followed the USD, though having appreciated by 2.7 % by the time of writing. At the G20 Seoul Summit on 11-12 November 2010, China committed to further reform the RMB exchange rate regime. We discuss here what a genuine basket peg could mean for China, with the view that the weight for the EUR should obviously be significantly increased, the SDR being a strong option for practical implementation. This would also have a positive impact on the EU. China’s currency reform has possible implications for its USD-dominated assets. Their reduction could trigger a further depreciation of the USD. The potentially costly consequences call for new rules for the world financial architecture. China’s expansion will inevitably lead to a diminishing international role for the USD.

CESifo Category
Monetary Policy and International Finance
Keywords: China, renminbi, yuan, basket peg, foreign exchange rates
JEL Classification: F300,F310,F330,F420