A bank staff member counts RMB and US dollar notes in Nantong, Jiangsu province, on Aug 28, 2019. [Photo/Sipa]

Exchange rate indexes are usually based on the importance of each foreign currency in a country’s international economic and trade activities and serve as key indicators of to what extent its monetary policy is tightened or loosened and to measure the transmission of external shocks.

Given that some countries regard the indexes as operational targets for their monetary policy, they are of great significance to their macroeconomic and monetary policies and foreign exchange system.

The weights of the currency basket of the China Foreign Exchange Trade System RMB Exchange Rate Index are calculated using the trade weighting method, which takes into account re-export trade factors; they are evaluated annually.

On Dec 31, the CFETS adjusted the currency basket weight in accordance with the CFETS RMB Exchange Rate Index Currency Basket Adjustment Rules.

The weight of the dollar dropped from 0.2159 to 0.1879, and that of the euro rose from 0.1740 to 0.1815.

The adjustments came into effect on Jan 1, marking the lowering of the dollar’s weight and the raising of the euro’s weight for the second consecutive year.

The weights of the Korean won, Australian dollar, Swiss Franc, Malaysian ringgit and other currencies have also been significantly adjusted.

The CFETS RMB Exchange Rate Index was introduced in December 2015, replacing the earlier practice of pegging the renminbi to the US dollar to keep the exchange rate relatively stable.

In 2016, the China Foreign Exchange Trading System increased the number of currencies from 11 to 24, and the first currency basket adjustment was implemented on Jan 1, 2017.

No adjustment was made in 2018 and 2019; the second and third adjustments were implemented in 2020 and 2021 based on the 2018 and 2019 trade data, which is a routine operation.

The latest adjustment may lead to the expansion of the RMB central parity fluctuation range, which is conducive to the reform and optimization of the RMB exchange rate formation mechanism in the established direction.

In recent years, the two-way volatility of the RMB exchange rate has increased significantly, a number of counter-cyclical adjustment mechanisms have been introduced one after another, and the RMB exchange rate formation mechanism has been continuously improved.