Is there evidence of “fear of appreciation” in China’s foreign exchange market intervention?

ABSTRACT

Using the data after the exchange rate regime reform in July 2005, this paper systematically studied the issue whether China has conducted ‘fear of appreciation’ asymmetric intervention. The results show that China’s intervention is discontinuous and asymmetric, rather than oversimplified ‘fear of appreciation’. China has a target range with respect to exchange rate deviation, and most observations are concentrated in this range, in which the exchange rate deviation can be tolerated. Outside the target range, the width of the range suggests that the tolerance level for appreciation is much higher than that for depreciation, whereas the estimated coefficients show that the monetary authority responds more vigorously to substantial appreciation than to depreciation. In addition, it can be expected that with the marketization of RMB exchange rate, China’s intervention degree will further decline.

KEYWORDS:

• Foreign exchange market intervention
• asymmetry
• target range
• threshold regression

JEL CLASSIFICATION:

• E58
• F31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Report to Congress on International Economic and Exchange Rate Policies, November 2005.

² Report to Congress on International Economic and Exchange Rate Policies, June 2007 to April 2015.

³ Report to Congress-Foreign Exchange Policies of Major Trading Partners of the United States, April 2017 and October 2017.

⁴ Report to Congress on International Economic and Exchange Rate Policies, October 2015.

⁵ Report to Congress on International Economic and Exchange Rate Policies, October 2015.

⁶ Financial Times (https://www.ft.com/).

⁷ Financial Times (https://www.ft.com/).

⁸ “Fear of appreciation”, coined by Levy-Yeyati and Sturzenegger (2007), is put forward to describe the behaviour that some emerging Asian countries intervene heavily in resisting domestic currency appreciation, while intervening modestly or leaving it alone to respond to domestic currency depreciation after the Asian financial crisis.

⁹ Due to lacking of China’s monthly $GDP$, existing research decomposes the quarterly $GDP$ weighted by the ratio of monthly industrial value added (monthly total retail sales of consumer goods) to quarterly industrial value added (or quarterly total retail sales of consumer goods). The correlation coefficient between quarterly $GDP$ and quarterly industrial value added and the total retail sales of consumer goods is 0.994 and 0.992, respectively, both of which are suitable choices. However, China has not published monthly industrial value added since December 2006, thus we chooses the total retail sales of consumer goods to deduce monthly $GDP$. In order to keep conformity, we use the same method to deal with the GDP data of the US.

¹⁰ Report to Congress on International Economic and Exchange Rate Policies, November 2005.

Additional information

Funding

This work was supported by the China Postdoctoral Science Foundation under Grant [2018M642806];Natural Science Foundation of Hainan Province under Grant [717089];the National Social Science Fund under Grant [16BZZ091]; and Liberal-arts Double First-Class Project of HUST under Grant [201905].