Chapter 4 Embracing the world (2015-Now)Since 2014, due to the quantitative easing policy of the United States and strong US dollar, domestic enterprises and banks have been more likely to buy foreign exchange instead of selling it. At the same time, private sectors and financial institutions at home witnessed more frequent fluctuations of RMB exchange rate within a wider range.Under this context, on August 11, 2015, the People's Bank of China (PBOC) announced a major improvement to the formation of the RMB's central parity rate against the U.S. dollar, claiming the components used in setting that daily fixing rate included previous day’s close, FX demand and supply conditions, and movement of major currencies. The reform made the central parity rate more consistent with the needs of market development.Following the change, the central parity rate of RMB weakened sharply to 6.2298 against the US dollar, compared with 6.1162 on Aug 10, nearly 2 percent lower. This “one-off” adjustment bridged the previously accumulated differences between the central parity rate and the market rate.On December 11, 2015, China Foreign Exchange Trade System released a yuan exchange rate composite index which could measure RMB strength relative to a basket of other currencies to better reflect the market.On October 1, 2016, the Chinese currency officially entered the Special Drawing Right (SDR) currency basket, joining the US dollar, euro, Japanese yen and British pound in the elite “club” of global reserve currencies. It was an acknowledgement of the progress China has made to get integrated into a global financial system, marking a historic milestone for China, the IMF and the international monetary system. Christine Lagarde, Managing Director of the IMF, commented that the renminbi would be considered by the international community as a "freely usable international currency".In May 2017, a "counter-cyclical factor" was introduced for the first time to the existing pricing model of the yuan's daily trading reference rate, aiming to moderate pro-cyclical fluctuations driven by irrational sentiment in the foreign exchange market.According to incomplete statistics, the number of brokers that had business in China totaled 1,000 by August 2016, including BFSforex, Forex.com, IFA, FXDD.To seize the momentum, many Chinese enterprises expanded their business to the forex sector.In January 2015, CITIC Securities bought almost 60% of the outstanding shares of KVB Kunlun, a publicly listed Hong Kong-based broker for 100 million dollars.In December 2016, eToro announced that it signed a strategic partnership with Lufax Holding Ltd, China’s largest internet finance company and the world’s largest peer-to-peer lending provider. The cooperation agreement between the firms was aiming to boost eToro’s profile with Chinese clients.In May 2017, HNA Group Co., Ltd overtook Blackrock to become Deutsche Bank's biggest shareholder after increasing its stake in the firm to nearly 10%. In October 2017, the Saxo Bank Group announced an offer received from Geely Financials Denmark A/S, a subsidiary of Geely Holding Group, to acquire a majority stake in Saxo Bank.Also in October 2017, ZuluTrade, was acquired by Formax Group, which had branches in 33 major cities in China.After 2015, many other large companies, such as Huawei, Haier, and WH Group (formerly known as Shuanghui Group) also resorted to the forex market to seek hedging.On January 21, 2020, XTX Markets became the first foreign non-bank market maker to price China’s foreign exchange interbank market (CFETS).The past 70 years has witnessed significant changes in the global economic system. China, however, survived many economic crisis, including the bursting of 1990 Japanese asset price bubble, 1997 Asian financial crisis, and 2008 sub-prime crisis, owing to the country’s appropriate and timely measures to keep the renminbi exchange rate overall stable. According to the data published by the Bank for International Settlements, from the beginning of 2005 to June 2019, the nominal effective exchange rate of the RMB appreciated by 38 percent and the real effective exchange rate by 47 percent, making it the strongest currency among the G20 economies and one of the currencies with the largest appreciation in the world.It will be normal for the RMB exchange rate to fluctuate flexibly in the short term in response to changes in market supply and demand. Expectations of long-term stability of RMB's exchange rate will remain unchanged through a series of two-way fluctuations, as China's economic fundamentals remain stable.The RMB exchange rate system is not perfect. But that should not be an excuse to write off China's remarkable progress in exchange rate reform.
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