Market Expectations and RMB Appreciation

This paper develops a framework to analyze how markets expectations and their influencing factors work on RMB fluctuations. Using the method of two-stage least square, the paper concluded that market expectations are one of the important factors that driving the strong RMB during the period of Jan. 2001 to June 2009. The appreciation of RMB in the previous period consolidated the confidence of market expectations on RMB appreciation in this period. However, central banks foreign market intervention and the latest RMB exchange rate regime reform depressed the market expectation on RMB appreciation.