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

Abstract

ABSTRACTUsing 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.