China’s exchange rate regimes revisited and bubble detection in 2005-2015

Abstract

The International Monetary Fund’s decision in 2015 to add the Renminbi to its Special Drawing Rights currency basket has in effect granted the Chinese Yuan the international reserve currency status. This study revisits China’s five exchange rate regimes in 2005-2015 and investigates the relationships among the currencies of the Chinese Yuan, the U.S. Dollar and the Euro. The Log-Periodic Power Law Singularity model is proposed as a generic parameterization to capture the super-exponential behavior in the tetrad of exchange rates of these currency pairs. The transient non-sustainable faster-than-exponential acceleration of the “CNY against USD” from August 2005 to July 2008 suggests the existence of an apparent bubble with an under-valuation. The clustered signals of LPPLS Confidence indicators for the “CNY against USD” from May 2011 to March 2012 suggest the termination of its long-term growth. The signals for the “EUR against USD” and “CNY against EUR” emerging from January 2014 to August 2015 show a tightly coupled relationship among these currency pairs. Moreover, the empirical estimates of the most possible critical time by the standard Ordinary Least Squares method and the Quantile Regression method for the time series of “CNY against USD” tends to be later than that of “CNY against EUR” in the five regimes.