Monitoring the Chinese currency regime

Ajay Shah, Achim Zeileis and Ila Patnaik, 2005.
Recomputed on Apr 04, 2006


Monitoring for structural change

We know there was a simple USD peg, with very little flexibility, in the history period, which covers August, September and October 2005. Then, we embarked on the monitoring process, where we examined the unfolding new data, and asked whether structural change has taken place.

From 1 November 2005 onwards, the empirical fluctuation process (black line) was compared against its boundary for rejection of stability (the red line). While the process stayed below the boundary, we could not reject the null that the currency regime was unchanged compared to that prevailing in the history period. But now the process has crossed the boundary, so we know something has changed.

Results for history period (1 August 2005 to 31 October 2005)


  • Call: lm(formula = cny.chf ~ usd.chf + jpy.chf + eur.chf + gbp.chf, Call: data = retdat)
  • Residuals

    Min1QMedian3QMax
    -0.0657-0.0210 0.0011 0.0214 0.0700


  • Coefficients

    EstimateStd. Errort valuePr(>|t|)
    (Intercept)-0.004782 0.002913 -1.642 0.106
    usd.chf 0.999653 0.006907144.725 <2e-16 ***
    jpy.chf 0.004668 0.008587 0.544 0.589
    eur.chf-0.014238 0.027425 -0.519 0.605
    gbp.chf-0.007744 0.015152 -0.511 0.611

    --- Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1


  • Residuals standard error: 0.0295 on 63 degrees of freedom
  • Multiple R-Squared:0.9979
  • Adjusted R-Squared:0.9978
  • F-statistics: 7577.26 on 4 and 63 DF. P-value:0.

    The 95% confidence interval for the residual sigma runs from 0.0255 to 0.0336.

    Paper: What is the new Chinese currency regime?, November 2005.

    (The paper reflects the situation as of a few weeks ago, at a time when you could not reject the null of stability).

    Abstract: The revaluation of the renminbi in July 2005 was described by the Chinese central bank as a change in the currency regime, rather than merely a changed level of the exchange rate. The reform was said to involve a shift away from the fixed exchange rate, a gradual movement towards greater flexibility, and a peg to a basket of currencies.
    This paper closely examines the post-July Chinese currency regime utilising contemporary ideas in the econometrics of structural change. We find that the renminbi has remained pegged to the US dollar, rather than to a basket, and has extremely limited currency flexibility. We find no evidence of structural change in the post-July period, which suggests that there has been no evolution towards greater flexibility. We show a monitoring procedure which will detect future evolution of the currency regime.

    Mentioned