Analysis of the RMB exchange rate formation mechanism based on the currency basket

In this paper, we study the RMB exchange rate formation mechanism based on the weights of each currency in the currency basket. To figure out the composition of the currency basket of RMB exchange rate and construct the weight model of the currency basket in empirical study, we use the monthly data of the import and export among China and USA, euro area, Japan, South Korea during the period of January 2006 to December 2012. Since 2005, the People´s Bank of China claimed that RMB exchange rate system will be reformed transferring from the actual pegged to the currency basket system. However, Compared with the proportion of U.S. dollar, euro, yen and won in the basket currency, we find that, at this stage, our exchange rate system is still pegged to the U.S. dollar, which will do harm to the economic development in a long term. It is essential and helpful for the formation of exchange rate to study on the composition of the currency basket in such a situation. Finally, some conclusions are get about the RMB exchange rate formation mechanism.