RMB Exchange Market Pressure and Central Bank Exchange Market Intervention

The present paper uses the model-dependent and the model-independent approach to measurethe RMB exchange market pressure (EMP) and the central bank’s intervention using monthlydata from January 1999 to June 2008. It is determined that the RMB has been under greatappreciation pressure over the past decade. However, the pressure has been weakeningsince 2005. The two approaches provide significantly different results in terms of the estimatedRMB EMP indices and the estimated central bank’s interventions. The differences may leadto different predictions of potential currency crises. According to the estimation of the RMBEMP, and based on the model-independent approach, the paper shows that China has beenunder threat of an appreciation currency crisis since 2008. Therefore, China should adopta moreflexible exchange rate regime to prevent a potential crisis.