编者语：
香港交易所首席中国经济学家办公室发表研究报告称从美元货币指数的历史发展经验来看，货币指数的发展对汇率价值估算具有重要的参考作用，也是提升货币可交易性和可运用性的重要工具。具有广泛市场运用前景的货币指数在确定指数内的货币构成及其权重时，既要考虑到本国与他国的贸易关系，也应考虑篮子货币在外汇市场和资本市场的流动性。敬请阅读报告原文（英文版）。
文/香港交易及结算所有限公司首席中国经济学家办公室SUMMARY
After the Renminbi (RMB) exchange ratereform in 2005 which introduced a basket of currenciesas reference for RMBcentral parity rates against foreign currencies, the currency basket hasbecomea major reference in determining RMB exchange rate in the following decade.During2005 to 2015, the RMB/USD bilateral rate became more flexible and movedcloser with otherAsian currencies. At the same time, the Euro, the BritishPound, the Canadian Dollar and theAustralian Dollar showed increasing influenceon the RMB value. In December 2015, the People’sBank of China announced for thefirst time the composition of the RMB’s reference basket ofcurrencies, furtherincreasing the transparency of the currency basket. A mechanism based on the“previousclosing rate” and the “exchange rate movements of a basket of currencies” isgraduallyestablished to determine the RMB/USD central parity rate. Thisclarifies how the currency basketwould influence the RMB central parity rate.The currency basket expanded further in 2016, and in2017 a counter-cyclicalfactor was introduced which enhanced the anchoring role of the currencybasketfor determining the RMB central parity rate.
The actual movements of the RMB exchangerate showed that, in nearly two years from the end of2015 to November 2017, theRMB exchange rate and the CFETS RMB currency basket indexexperienced severalstages of interaction. During the period, the currency basket had experiencedatrend from devaluation to slight appreciation. With increased reference to thecurrency basket inthe pricing of the RMB, the flexibility of the RMB/USDexchange rate has also increased. Thisfosters a healthy shift of the RMBexchange rate from a one-way movement to two-wayfluctuations and promotesexchange rate equilibrium in the medium- to long-term.
The historical development of the USDollar indices exemplifies that currency indices have muchreference value forcurrency pricing. They are also important tools that improve the tradabilityandusability of currencies. In designing the composition and the weightings ofreference currencies fora currency index to enable its extensive market use,the home country’s trade relations with othercountries, as well as theliquidity of the reference currencies in the foreign exchange and capitalmarkets,are factors to be taken into consideration. With this perspective, HKEX andThomsonReuters, in compiling their jointly developed RMB Currency (RXY)Indices, have taken into accountthe liquidity of trading in RMB against othermajor currencies, and exercise dynamic adjustment ofcurrencies and theirweightings in the reference basket on a periodic basis based on a highlytransparentset of formulae. Thereby, the indices can duly reflect the direction and thedegree ofmovement in the RMB exchange rate against other currencies, makingavailable usefulinstruments for facilitating market-based RMB exchange ratereforms.
1. RMBEXCHANGE RATE REFORM IN 2005 AND 2010: CURRENCY BASKET BECAME A REFERENCEBENCHMARK
1.1 2005: Towards a managed floating exchangerate regime with the introduction of a currency basket
Reforms in the Renminbi (RMB) exchangerate can be traced back to 1994 when the RMB’sofficial exchange rate and theforeign exchange (forex) swap market rate were unified, whichbrought thecurrency’s value from RMB 5.8 per US Dollar (USD) down to RMB 8.7 per USD.Thissignified the beginning of a unified managed floating exchange rate regimebased onmarket supply and demand. During the 1997-98 Asian financial crisis,Thai Baht and otherAsian currencies plunged but the value of the RMB againstthe USD remained stable at aboutRMB 8.28 per USD.
On 21 July 2005, the People’s Bank ofChina (PBOC) announced the adoption of a managedfloating exchange rate systembased on market supply and demand, with reference to abasket of currencies.This officially marked the beginning of market-based reforms for thefixings ofRMB central parity rates. This was also the first time that the PBOC made itclearthat the RMB exchange rates will be determined with reference to a basketof currencies, dropping its peg to the USD. The reform started off a process ofadjustment that saw the RMBexchange rate moving from its value beingunder-estimated to a more balanced and adjustedvalue.
In June 2010, the PBOC, in another roundof exchange rate reform, stressed that the RMBexchange rates were to shift frombilateral to multilateral references, with greater emphasisplaced on a basketof currencies. The exchange rate fixing mechanism that makes referenceto abasket of currencies is one that operates between a currency peg and a floatingrateregime — it offers greater flexibility than a currency peg and brings notas big a volatility as toeasily set off financial turbulence than it mightunder a floating rate regime. It helps realise theimplementation of stablemacroeconomic policies and prevent speculative cross-border capitalflows. Alongwith the continuous opening up of the Chinese economy, China’s major tradepartnershave become increasingly diversified and its external investments have extendedtomultiple regions. Therefore, pegging to a basket of multiple currencies willmore accuratelyreflect the RMB exchange rates and will also increase itsflexibility.
1.2 2005-2015 currency basket: The projectedcomposition and its impact on the RMB exchange rate
After the 2005 exchange rate systemreform, despite repeated pronouncement of theimportant role of the currencybasket in RMB pricing, the PBOC did not directly disclose thebasket’scomposition, currency weightings and pricing mechanism. Hence, outsideobserversand researchers, based on RMB/USD movements, came up with variousprojections of theirown regarding the relationships between the RMB and the USDand other currencies in thereference basket.
The movement of the RMB/USD central parityrate demonstrated that for most of the time after2005, the rate was basicallyfixed with reference to a basket of currencies, except during thetime of the2008 global financial turmoil when the RMB was re-pegged to the USD. Between2005and the financial crisis in 2008, the RMB/USD exchange rate was on anacceleratingtrend of appreciation. The RMB/USD exchange rate appreciated 5.5%and 10.9% respectivelyby the second year and the third year since the exchangerate reform on 21 July 2005. By November 2008, the RMB/USD exchange rate hadappreciated by about 19%. On theoutbreak of the 2008 global financial crisis,the RMB/USD exchange rate regained stability; theRMB was once again pegged tothe USD. Until the subsequent exchange rate reform in June2010, the fluctuationin the RMB/USD exchange rate continued to widen. On the one hand, this was dueto the gradual expansion of the official band of the RMB exchange rate from0.3%to 2%. On the other hand, it reflected the increasing influence of the currencybasket onthe RMB central parity rate.
Using simulation analysis, academicsprojected the currency composition and weightings inthe currency basket and theimpact of the currency basket on the RMB central parity rates. A study foundthat, other than the period during the 2008 financial crisis, the USD had anabsolutedominant position in the RMB’s reference basket of currencies; some referencecurrencieswere pegged to the USD and so their impact on the RMB was also fully manifestedthroughthe USD. According to the study, the USD’s weighting in the currency basket atthattime was probably around 80%, a percentage notably more substantial thanthat theoreticallyrequired for any stable balance of payment.
Secondly,weightings in the currency basketprobably changed dynamically. The weightingsof emerging market currencies, such as theRussian ruble and the SingaporeanDollar had probably increased. Thirdly, the monetaryauthority’s usage of thecurrency basket for exchange rate reference was at a low level at thattime,hence, its effect on the RMB exchange rate was limited. According to anotherstudy, such characteristics continued after 2010 with the supremacy of the USDin the currencybasket continued; but the weighting of the USD had somewhatdeclined along with theincrease in the weightings of the Asian currencies whichincluded the Japanese Yen, theKorean Won, the Singaporean Dollar, the Malaysianringgit, the Philippines peso, the NewTaiwan Dollar and the Thai baht. Theincrease in weightings of the Asian currencies reflectedthe increasinginfluence of China’s trade relations with East Asia.
By and large, in a decade after itsintroduction in 2005 as the reference for the RMB centralparity rates, thecurrency basket has gradually become the major reference in RMB pricing.Albeitit was not clear about the composition of the currency basket or its effect onthe RMBcentral parity rates during this period, both the actual exchange ratemovements andacademic studies showed that the flexibility of the RMB/USDexchange rate had been growingand the relationship between RMB and the Asiancurrencies was deepening during the period.The Euro, the British Pound, theCanadian Dollar and the Australian Dollar were also found tohave an increasinginfluence on the RMB exchange rate. The gradual and dynamic change ofthe RMBexchange rate against the currency basket during that period demonstrated theincreasingdiversification of China’s external trade relations and its economic structuraladjustments.
2. 11AUGUST 2015 REFORM: CURRENCY BASKET BECOMING ONE OF THE TWO ANCHORS FOR RMBCENTRAL PARITY RATES
2.1 A transparent RMB reference currencybasket
On 11 August 2015, the PBOC announced theadjustment of the quotation mechanism for theRMB/USD central parity rate,setting off a new round of exchange rate reform under which theRMB centralparity rates become more market-driven. In December 2015, the RMB exchangeratefixing mechanism became more transparent as the PBOC officially published forthe firsttime the composition of the reference currency basket. China ForeignExchange TradeSystem (CFETS) publicly released for the first time the CFETS RMBIndex which reflects theRMB exchange rates against 13 currencies traded atCFETS. The USD, the Euro and theJapanese Yen had the highest weightings at26.40%, 21.39% and 14.68% respectively,followed by the Hong Kong Dollar (6.55%)and the Australian Dollar (6.27%). The samplecurrency weightings are calculatedbased on international trade weightings with adjustmentsof re-export tradefactors. Trade volumes represented by the currency basket index accountedfor asmuch as 60.4% of China’s external trade volume (see Table 1).
To provide for observation of changes inthe RMB exchange rate from different perspectives,CFETS publishes a RMB indexthat refers to the Bank for International Settlements (BIS)currency basket andanother that refers to the International Monetary Fund (IMF) SpecialDrawingRights (SDR) currency basket. Compared to the BIS effective exchange rate indexforRMB, the CFETS RMB Index assigns higher weightings to the currencies of major developed countries, with also the inclusion of East Asian and Russian currencies but not a wider rangeof emerging market currencies.
In the currency basket published by CFETSin 2015, the USD had a weighting far below itspreviously estimated percentage(see section 1.2). In this new currency basket, the USDtogether with the HongKong Dollar had a combined weighting of 33%. Obviously, the launchof the newcurrency basket marked the gradual transition of the RMB exchange rate policyfrompegging to the USD to adopting a floating rate mechanism under which theexchangerate is increasingly determined by market forces and trade relations.
2.2 Interactions between RMB centralparity rate and CFETS Index: Four stages oftransitions
After CFETS’ official release of its RMBIndex, the currency basket has taken on a greater rolein the RMB exchange rate.The RMB/USD central parity rate is being determined by amechanism that is basedon the “closing rate” and the “exchange rate movements of a basketofcurrencies”. This clarifies the principles based on which the currency basketwould influencethe RMB central parity rate.
Specifically, under the new central parityrate formation mechanism, the RMB/USD centralparity rate is based on both the“closing rate on the previous trading day” and the “exchangerate movements of abasket of currencies”. The “closing rate” refers to the RMB/USD closingexchangerate in the interbank forex market at 16:30 on the previous day. This factormainlyreflects supply and demand in China’s forex market. The “exchange ratemovements of abasket of currencies” refers to the adjustment that is requiredin the RMB/USD exchange ratein order to maintain the stability of the RMBagainst a basket of currencies. Under thismechanism, the RMB central parityrate is increasingly bound by the currency basket, whichhas gradually becomeone of the two anchors that determine the RMB central parity rate.
As indicated by actual exchange ratemovements, from the end of 2015 to November 2017, the RMB central parity rateand the CFETS RMB Index experienced differentdevelopment stages (see Figure 2):
(1) Stage One — from the announcement ofthe RMB central parity rate mechanism at theend of 2015 to mid-2016This stageis characterised by depreciation of the USD a fall in the CFETS RMB indexand astable central parity rate.The USD index fell from its peak after the firstinterest rate hike in 2015 and started toweaken. Under the new RMB centralparity rate mechanism, the central parity rate shouldrise correspondingly.However, during that period, the RMB was weak against non-UScurrencies suchthat the CFETS RMB Index showed depreciation (from 100.94 points toaround 95points). This resulted in basically a flat central parity rate that hovered intherange between 6.55 and 6.85.
(2) Stage Two — from mid-2016 to end of2016This stage is characterised by a rising USD, a stable CFETS RMB Index and adevaluationof the central parity rate.The USD index was driven up by factors includingchanges in risk profiles as a result ofthe Brexit vote (voting on Britain’sexit from the European Union) in June 2016 andDonald Trump’s winning in the USpresidential election in November the same year, andthe expectations ofinterest rate hikes by the end of 2016. The USD index was on anoverall upwardtrend, rising from 94 points to a peak of 103 points at the end of 2016, whilenon-US currencies (including RMB) depreciated against the strong USD. As aresult,the RMB exchange rate against the currency basket was largely stableduring this periodsuch that the CFETS RMB Index moved steadily and remained atthe level of 94-95points. The result was that the RMB central parity ratedepreciated against the USD,reaching the lowest level of 6.94.
(3) Stage Three — from early 2017 tomid-May 2017This stage is characterised by depreciation of the USD, a slightfall in the CFETS RMBIndex and a stable central parity rate.During this period,Trump policies were challenged and expectations for a strong USDbegan torecede. The Euro rose as European economic fundamentals strengthened andsystemicrisks in European politics subsided. The USD weakened correspondingly. AstheUSD continued to weaken, the RMB recorded a modest depreciation against abasketof currencies. The CFETS RMB Index fell from 95.25 points to 92.26points. The RMBcentral parity rate remained largely in the range of 6.85-6.90without rising in response tothe weak USD. The RMB exchange rate and the CFETSRMB Index had basically thesame movement trends as in stage one.
(4) Stage Four — from late May 2017 to endof November 2017In this stage, the PBOC introduced a counter-cyclical factor tothe quotation formula forthe RMB/USD central parity rate to offset anyunilateral expectation driven by marketsentiments. This stage is characterisedby depreciation of the USD, a modest rise in theCFETS RMB Index, the USDdepreciation effect being offset by the counter-cyclicalfactor and asubstantial rise in the central parity rate.After the introduction of thecounter-cyclical factor, the RMB/USD central parity rate isdetermined based onthree factors: the closing rate on the previous trading day,exchange rate movementsof a basket of currencies and the counter-cyclical factor.According to thePBOC’s Monetary Policy Report (2017Q2), the counter-cyclical factorwascalculated in the following way: firstly, the quoting banks broke down thechange inthe closing price into two parts — the part due to changes in exchangerates of thecurrencies in the reference basket and the part due to RMB demandand supplyconditions; then, counter-cyclical adjustment was applied to thefactor of demand andsupply conditions, in order to weaken the herding effect inthe forex market. In calculatingthe counter-cyclical factor, the first step wasto remove the impact of the currency basketfrom the difference between theprevious closing rate and the central parity rate, therebyobtaining the changein the RMB exchange rate that mainly reflects market supply anddemand. Thecounter-cyclical factor can then be determined by adjusting the countercyclicalcoefficient,which is set by quoting banks based on factors like changes in theeconomicfundamentals and the extent of procyclicality in the forex market.As the impactof supply and demand was largely offset by the counter-cyclical factor intheactual quotations, the anchoring effect of the currency basket on the RMBcentralparity rate was further strengthened. After the second quarter of 2017,the USD indexcontinued its downtrend while the CFETS RMB Index rose steadily toaround 95 points.Due to the filtering effect of the counter-cyclicalcoefficient, the RMB saw considerableappreciation against the USD.
2.3 Composition and impact of the newcurrency basket
2.3.1 The increased impact of Euro andJapanese Yen on RMB
At the end of 2016, the PBOC once againmodified the composition of the currency basket.The number of currencies in thebasket was increased from 13 to 24. The trade volumerepresented by the new currencybasket accounted for 74% of China’s total external trade,which is much higherthan that represented by the old index. The new CFETS RMB Indexis thereforemore representative.
In the new currency basket, the weightingof the USD fell from 26.4% to 22.4%. Includingthe Hong Kong Dollar which ispegged to the USD, the USD had effectively a weighting of26.7% in the basket.Euro and the Japanese Yen had a combined weighting of 27.8%,surpassing that ofthe USD (see Table 2).
In 2016, the RMB depreciated by around6.5% against the USD, and by 3.9% and 9.4%against the Euro and the Japanese Yenrespectively. The RMB devaluation was relativelysubstantial, driving the CFETSRMB Index down. In the first 11 months of 2017, the RMBappreciated 5.08%against the USD, but remained stable against the Japanese Yen anddepreciated by6.8% against the Euro. This resulted in a relatively steady but weakeningCFETSRMB Index. The increasing influence of the Euro and the Japanese Yen on theRMBshowed that the RMB is no longer linked unilaterally to the USD but is havingbiggerinteractions with other major currencies in the international market. Inthis way, the RMBexchange rate could achieve a level that better serves China’sneed to improve its tradeconditions as well as the needs of Mainlandenterprises to adapt to structural adjustments.
2.3.2 The increased weightings of managedfloating currencies in the basket
Since the change in composition at the endof 2016, the CFETS RMB Index currencybasket newly admitted a number of emergingmarket currencies to reflect China’s traderelations with these countries. Theseinclude the South African Rand, the Mexican Peso,the Emirati Dirham, the SaudiRiyal, the South Korean Won, the Turkish Lira and others.(See Table 2.)
On the other hand, the inclusion of morecurrencies with a managed floating exchange ratesystem accordingly reduced theweightings of free-floating currencies like the USD, theEuro, the Japanese Yenand the Hong Kong Dollar. This would reduce the volatility of thecurrencybasket and in turn the overall flexibility of the RMB exchange rate. In the newbasket,the South African Rand, the Mexican Peso, the South Korean Won and the TurkishLiraare currencies of managed floating rates, while the Emirati Dirham and theSaudi Riyalare fixed-rate currencies. The aggregate weighting of thesecurrencies in the new CFETSRMB Index was 18.9%.
A relatively stable basket of currenciesis favourable to managing market expectations onthe RMB exchange rate. It mayalso help improve trade competitiveness and maintain thestability of thecurrency’s purchasing power. However, with a larger number of low-volatilitycurrenciesin the currency basket, the RMB exchange rate may not be able to reactpromptlyto changes in supply and demand. As a result, the RMB’s flexibility vis-à-visothercurrencies in coping with market risks, and therefore its ability tomitigate risks, might bereduced.
2.3.3 The stability of exchange rateagainst currency basket supports other macroeconomic targets
After the introduction of thecounter-cyclical factor, the RMB/USD exchange rate becamemore volatile,changing the historical trend that had inclined towards a falling rather than arisingRMB against the USD. The RMB rapidly appreciated subsequent to the introductionofthis measure on 26 May 2017. On 11 September, the PBOC scrapped reserverequirementsfor foreign exchange purchase and made use of the counter-cyclical factor topreventover-adjustment. As a result, the RMB/USD exchange rate fluctuated within aconfinedrange.
With the counter-cyclical factor in place,the benchmarking effect of the currency basket onthe RMB exchange rate wasenhanced. As exchange rate movements of the basketcurrencies are highly random,reference to the currency basket in determining the RMB’svalue means that theRMB would have less tendency to move in a single direction,achieving more orless an equilibrium in the medium to long term. On the one hand, itfosters thehealthy development of two-way movements in the RMB exchange rate. On theotherhand, the relative stability of the exchange rate against a basket of currencieswould lessen the burden on the foreign exchange reserves, allowing a continuousrebound of theforeign exchange reserves. By October 2017, the foreign exchangereserves increased fornine consecutive months to US$3.1 trillion (see Figure3).
3. OUTLOOK ON MARKET USAGE OF RMB INDICES
3.1 Experience from USD indices: majorindices and composition
USD indices are currently the world’s mostimportant currency indices and are criticalmeasures of global financial marketconditions and trends. In their 40 years of history, USDindices have evolved tohave assumed different functions. The USD index family now consistsof indicesof different currency composition and weightings, being used to gauge andassessthe value of the USD.
According to the different functions, theexisting USD index family may be categorised into (1)USD indices compiled bythe US Federal Reserve (FED) and international entities, and (2)USD indicescompiled by exchanges or business entities.
3.1.1 USD indices launched by the US FED
The earliest USD index in use was theTrade Weighted U.S. Dollar Index: MajorCurrencies (or DTWEXM) developed by theFED in the 1970s. This USD index has beenused for tracking the value of the USDafter the disintegration of the Bretton Woods system.The reference basket ofcurrencies for this index comprises 7 currencies — the Euro, the CanadianDollar, the Japanese Yen, the British Pound, the Swiss Franc, the AustralianDollarand the Swedish Krona. The weighting of each currency in the basket is based ontradeconditions between the home countries of the respective currencies and the US.
After the 1990s, emerging markets haveentered into the world’s industry production chainand have growing bilateraltrades with the US. A USD index that make reference to thecurrencies of only afew developed countries would not be able to reflect the tradedynamics betweenthe US and the world. Consequently, based on DTWEXM, the US FEDdeveloped theTrade Weighted U.S. Dollar Index: Broad (or TWEXB), and TradeWeighted U.S.Dollar Index: Other Important Trading Partners (or TWEXO).
TWEXB included an additional 19 currencieson top of the seven tracked by DTWEXM. Themajority of the 19 currencies arethose of emerging markets which are important tradepartners of the US. The USFED also compiled TWEXO based on these 19 currencies. AsTWEXB covered the majorUS trading partners, its adjustment in weightings constantlyreflect thechanging trade relationships between the US and these countries. It hasthereforebecome the most significant benchmark of the US’ competitiveness ininternationaltrade.
From a functional perspective, TWEXB andTWEXO were developed mainly as a referencefor research on the forex market andfor forex policy making. Currencies and theirweightings in these indices wereselected and determined mainly on the basis of the traderelations of the USwith its major trade partners, especially with the emerging markets. Theextentto which these currencies are used in the financial market, especially in theforexmarket are, however, not taken into account. In addition, these indicesare not timelyupdated and the US FED has not licensed their use for commercialpurposes. Marketparticipants would have to go for alternative instruments ifthey want to assess the impactof bilateral exchange rate movements on thecurrency basket indices so as to conducttimely financial activitiesaccordingly.
3.1.2 USD indices developed by marketentities
This kind of indices is well representedby the U.S. Dollar Index (DXY) developed by theIntercontinental Exchange (ICE).It is the earliest and the most widely used USD index inthe market. Initially,its reference currency basket and the weightings were mainly based onthe trade volumes between the US andits major trade partners, reflecting the competitivedynamics of US exports. TheEuro replaced 12 of the currencies in the basket upon its birthin 1999. The DXYbasket consists of six currencies, namely the Euro, the Japanese Yen,theBritish Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. Thecomposition and currency weightings of DXY remainunchanged up to now.
Since the USD is the world’s major reservecurrency, many commodities are denominatedin the US Dollar. Both traders andinvestors require a USD trading instrument with highliquidity in order tomanage the forex risks of commodities and investment portfolios. TheDXY, beinghighly dynamic, can promptly reflect the impact of forex volatility on the USD.Theindex is recognised as the most significant USD benchmark by global traders,analystsand economists. Currency futures based on the DXY are widely used inthe internationalforex market for investment and hedging purposes.
It is noteworthy that European currenciesweigh as much as 77% in the DXY. The Euroalone has a weighting of nearly 58%.Such a characteristic results in that the DXY is highlysensitive to economicchanges in the European Union. Any movement in the value of theEuro wouldaffect the index to a large extent. To avoid the drawback of the currencyconcentrationin Europe, other USD indices of different compositions were developed bymarketentities. In 2011, Dow Jones released the Dow Jones FXCM Dollar Index, whichhavethe Euro, the British Pound, the Japanese Yen and the Australian Dollar as itsreferencecurrencies on consideration of their high liquidity and high correlation withtheUSD in global forex transactions as well as their low cost of trading.Weightings wereequally assigned to each currency (25%).
Other indices of a similar nature includedthe FTSE Cürex’s USDG8 and the BloombergDollar Spot Index (BBDXY). Whenselecting reference currencies, the two indices not onlytake into account theimportance of a currency and its tradability in the global financialmarket andin commodity trading, offshore RMB is also included in the currency basket. Itishoped that, the problem of over-weighting the Euro in the reference currencybasket couldbe addressed by including in the basket an emerging market currencywith a growingimportance. These indices have given greater consideration totrade volumes in the forexmarket in determining the reference currencies andtheir weightings, and have adoptedrelatively scientific calculation methods.Nevertheless, they have a relatively short historyand therefore have not beenable to challenge the market standing of DXY and its relatedfutures products.
3.2 Market-based RMB exchange rate indices
From a functional perspective, China’smost important RMB index, the CFETS RMBIndex, largely serves as an aid tomacroeconomic policy making. With functions andcomposition similar to the USFED’s TWEXB, it provides an all-round indicator formacroeconomic usage.However, in respect of market trading, it is clear that newinstruments andrelated derivatives need to be developed to serve market participants as RMBbenchmarksfor investment and hedging purposes.
Studies have been carried out in theMainland on the development of a market-based RMBindex. The Shenzhen SecuritiesInformation Co., Ltd. and CCTV Finance jointlydeveloped and released a RMBindex in 2013, before the announcement of the CFETSRMB Index. This index usesthe USD, the Euro, the Japanese Yen, the Hong Kong Dollar, theAustralianDollar, the Canadian Dollar, the British Pound, the Russian Ruble, the MalaysianRinggit,and the Korean Won as the reference currencies to reflect the overall movementofthe RMB exchange rate. The currency weightings in the index were determinedbased on theweighting of each currency in China’s bilateral trade volume andgross domestic product (GDP)respectively on a ratio of 1:1. The currencyselection process and the determination ofcurrency weightings for this RMBindex represented a certain degree of innovative exploration.Before thecurrency reform in August 2015, the correlations of this RMB index with USDindiceswere relatively high, but the degree of correlation diminished after the reform.
3.3 TR/HKEX RMB Currency (RXY) Indices
3.3.1 RXY Indices — a RMB index seriesdeveloped with reference to the principles of theCFETS RMB Index and the DXY
In 2016, HKEX and Thomson Reuters (TR)launched the family of RXY Indices withreference to the CFETS currency basket,using 13 currencies as the reference currencies.The index series is highlydynamic and transparent, with hourly updates. Currencyweightings are based onChina’s annual trade volumes with the respective home countriesof the basketcurrencies, provided by UN Comtrade.
Unlike the USD index DXY where currencyweightings are based on the US tradevolumes with the respective countries orregions in 1999 and are unchanged overtime, currency weightings in the RXYIndices are adjusted annually in accordance with thelatest trade data. AsChina’s external trade structure is still changing, such adjustments incurrencyweightings will better reflect the evolution of China’s external tradestructure.
3.3.2 Correlation and tradability ofexchange rate indices
TR/HKEX RXY Reference CNY Index is foundto be highly correlated with the onshoreRMB against the USD (CNY/USD) exchangerate and the CFETS RMB Index (correlationcoefficients are above 0.86, see Table5). Therefore, the index can reflect relatively well thechanges in the RMBexchange rate and can serve as a benchmark simulating the CFETSRMB Index.
In terms of volatility, CNY/USD had anaverage volatility of 1.58% in the six months beforethe exchange rate reform on11 August 2015. It rose to and 2.29% in the following twoyears or so after thereform. This shows that, along with the RMB exchange rate regimebecomingincreasingly market-driven, the volatility in the RMB exchange rate hasincreased.After the aforesaid reform, RXY Reference CNH Index had an averagevolatility of 4.00%,compared to 2.69% for the CFETS RMB Index, reflecting theimpact of external marketvolatility on the offshore RMB exchange rate (seetable 5). It is believed that futuresproducts developed based on RXY indices,would be able to provide a closer tracking ofmovements in the value of offshoreRMB.
3.3.3 Market implications and outlook
With reference to the development historyof the USD indices, the reference value of acurrency basket index and thetradability of the index mainly depend on the currencycomposition andweightings in the index. Given the progressive development of thefinancialmarket and the growth in forex trading, major factors to be considered indeterminingthe currency basket of a RMB index should include, apart from trade relations,theliquidity of the currencies in the global forex market and the impact of theirexchangerate volatility on the RMB.
To conclude, in developing a currencyindex of potentially an extensive market use, thehome country’s trade relationswith other countries as well as the liquidity of the referencecurrencies in theforex and capital markets have to be taken into consideration. In thisperspective,the RXY Indices take into account the liquidity of trading in RMB againstothermajor currencies and exercise dynamic adjustment of currency compositionandweightings in the reference basket on a periodic basis based on a highlytransparentset of formulae. Thereby, the indices can duly reflect the direction andthedegree of movement in the RMB exchange rate against other currencies. Thismakesavailable useful instruments for facilitating market-based RMB exchange ratereformsand lays a sound foundation for the development of RMB risk-hedging toolsandother related financial products.
ABBREVIATIONSOF CURRENCIES
AED United Arab Emirates Dirham
AUD Australian Dollar
CAD Canadian Dollar
CHF Swiss Franc
CNH Offshore Renminbi
CNY Onshore Renminbi
DKK Danish Krone
EUR Euro
GBP British Pound
HKD Hong Kong Dollar
HUF Hungarian Forint
JPY Japanese Yen
KRW South Korean won
MXN Mexican Peso
MYR Malaysian Ringgit
NOK Norwegian Krone
NZD New Zealand Dollar
PLN Polish Złoty
RUB Russian Ruble
SAR Saudi Riyal
SEK Swedish Krona
SGD Singapore Dollar
THB Thai Baht
TRY Turkish Lira
USD US Dollar
ZAR South African Rand
References
1. Lu Xiaoming, A comparison of thecharacteristics and usage of nine US Dollar Indices,(〈九种美元指数的特征及运用比较分析〉),《国际金融》,September 2017.
2. Mico Loretan, Indexes of the foreignexchange value of the Dollar, 2005.
3. Xie Hongyan, Estimation of weightingsin the RMB currency basket since the latest exchangerate reform and comparisonwith the optimal weightings (〈新汇改以来人民币汇率中货币篮子权重的测算及其与最优权重的比较〉), 《世界经济研究》, Issue3, 2015.
4. Zhang Ming, RMB exchange rate:Mechanism changes and future directions (张明，《人民币汇率：机制嬗变与未来走向》),September 2017.
5. Zhou Jizhong, RMB’s reference currencybasket: composition, stability and level of commitment (周继忠，〈人民币参照货币篮子：构成方式、稳定程度及承诺水平〉),《国际金融研究》,March 2009.（完）
文章来源：香港交易及结算所有限公司首席中国经济学家办公室（本文观点仅代表作者作为一位研究人员个人的看法，不代表任何机构的意见和看法）
本篇编辑：薛瑶
