Purpose
The paper aims to investigate the determinants of China’s daily intervention in the foreign exchange market since the 2005 reform aimed at moving the Renminbi (RMB) exchange rate regime towards greater flexibility.
Design/methodology/approach
The paper uses bivariate probit models to test whether China’s intervention decision is driven by three sets of factors, comprising Model I (basic model), Model II and Model III.
Findings
Evidence from the models suggests that medium-term Chinese interventions tend to be leaning-against-the-wind, whereas long-term interventions are leaning-with-the-wind. Furthermore, by analyzing exchange rate volatility, this paper finds that intervention is used by the Chinese central bank to ensure that there are no big swings in the RMB exchange rate.
Originality/value
The paper will be of value to other researchers attempting to understand the policy of the central bank and, in particular, the factors that can lead to interventions during periods of financial crisis.
RMB exchange rate regime reform and the Trilemma facing LOEs
