3% Constraints On RMB Exchange Rate Flexibility

< p > the "3% constraint" has caused controversy among researchers and traders: researchers believe that this is the institutional arrangement to promote the stability of exchange rate. The original intention is to prevent the devil in the details. However, the front-line traders believe that the < a href= "http:// www.91se91.com/news/index_c.asp" > system design < /a > is to prevent the market from stopping, and the bank quoted price amplitude to customers can actually break through the upper and lower amplitude range of 2%.

< /p >

< p > < strong > devil details, < /strong > < /p >

< p > from the logic of Lu commissar, the "3% constraints" can be explained from the following examples.

Suppose that one day the US dollar is 6 against the central parity of RMB. According to the latest wave amplitude management, its fluctuation range is 5.88 to 6.12 (up and down 2% respectively), and the RMB a href= "http://www.91se91.com/news/index_c.asp" > exchange rate < /a > once there is severe shaking in the day (for example, falling to 6.12 and then rebounding to 5.88).

< /p >

< p > according to the political commissar's view, < a href= "http://www.91se91.com/news/index_c.asp" > foreign exchange < /a > the designated bank's quotation range can only fluctuate in the range of 6 up to 1.5% of the middle price, and its fluctuation range is 5.91 to 6.09. The fluctuation risk of the foreign exchange rate outside the fluctuation range is borne by the bank itself, but in order to avoid the 0.5% risk, the bank has no power to use the fluctuation range of 2%.

< /p >

< p > but Zhao Qingming, an expert on international financial issues, told the first Financial Daily reporter that there is logic in theory, but it is very difficult to see that extreme situation in practice.

"3% restraints should be designed for the sake of preventing extreme situations and stabilizing the RMB exchange rate. The fluctuation of 3% can constitute a constraint on banks' quotations, and this constraint will not be triggered under normal circumstances, because the exchange rate market is different from the stock market, and there will not be any extreme intra day two-way market, such as the rebound to the point of trading after a sharp drop to the limit."

< /p >

< p > that is to say, taking the above 6 as the intermediate price and the intraday volatility 2% as an example, only when the limit of the first limit and the latter limit is reached, the bank's price difference between the selling price of the US dollar (6.12) and the bid price (5.88) will be more likely to exceed the 3% of the intermediate price and thus play a binding role.

< /p >

< p > Zhao Qingming believes that unilateral 2% of Foreign Exchange Volatility and 3% of bilateral banks' quotations for customers' quotations are similar to the "snake like floating mechanism" in the EC era, in order to prevent fluctuations in exchange rate under extreme circumstances.

< /p >

< p > serpentine floating mechanism is a monetary fluctuation design rule in the EC period designed to stabilize the euro area currency. The currencies of all countries are linked to the US dollar, the fluctuation rate of the US dollar exchange rate is 2.25%, while the volatility of the European Community currencies is 1.125%.

< /p >

< p > as for "technical Omissions", Lu political commissar is only based on the expansion of each wave, the bank's quotation of the quoted price spreads of the clients is correspondingly postponed by 1 percentage points, and the bold speculation is similar to that of Zhao Qingming. Lu commissar is more inclined to think that the essence of the central bank's move is still a cautious attitude on the exchange rate issue.

< /p >

< p > < strong > preventing market stops from < /strong > /p >

< p > but with the understanding of Lu commissar, Liu Dongliang, an analyst at the head office of China Merchants Bank, believes that there is a deviation in the understanding of "devil details". "3% is not a fluctuation of 1.5% based on the middle price, but a fluctuation of 3%. Taking the middle price of 6 as an example, the fluctuation of 3% means a fluctuation of 1800 basis points. That is to say, the bank's quotation can be reported to 6.18, the volatility of 2% is aimed at the limit line between banks, but the quotations can be 3%, that is to say, 3% is a section that runs within 4%, and it can break through one side of the" 4% ".

< /p >

< p > > and Liu Dongliang emphasized that the previous paction has proved its understanding. "Before expanding the amplitude, the quotation for the guest is not allowed to exceed 2%, which means that the central parity price is 6, the limit is 6.06, but the quotation to the guest can reach 6.12, so the traders have done so. Now the RMB's overall intra day volatility to the US dollar has been extended to 2%, and the quotation for the guest can reach 6.18 further."

< /p >

"P", a foreign exchange trader, also told reporters that the practice is indeed as described by Liu Dongliang.

< /p >

< p > Liu Dongliang believes that there are two intersections which do not contain each other, but that is, "avoiding the market halt when the market is down, leaving room for the banks to buffer".

< /p >

< p > with practical examples, once the market is down to 6.12, in order to maintain the difference between the selling price and the buying price, and at the same time banning the bank from breaking the 6.12 offer, the market is likely to face a halt. However, the central bank should also avoid the competition between banks in hostile bidding, which will result in the fluctuation of the RMB exchange rate of the guest disk too large, so the quotation must be limited.

< /p >