Determination of China’s Foreign Exchange Intervention: Evidence from the Yuan/Dollar Market

Abstract

Purpose The paper investigates the determinants of China’s daily intervention in the foreign exchange market since the 2005 reform aimed at moving the 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, while long-term interventions are leaning-with-the-wind. Furthermore, by analysing 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.