How are exchange rate prices determined? I think there are basically two ways. The first is to follow market rules and be determined by market supply and demand.

If the two curves in the figure can find their equilibrium points automatically, there will be no need for external intervention. If there are more U.S. dollars, the U.S. dollar will depreciate, and if there are fewer U.S. dollars, the U.S. dollar will appreciate. If the supply and demand for U.S. dollars are exactly equal, its value will be stable at the equilibrium point and will not change.

Except for equilibrium point E, the RMB-USD exchange rate is in an unbalanced state at any other position in the figure. In this case, the decision-making power of the exchange rate lies in the hands of the government, and it depends on what kind of imbalance the government wants to maintain the exchange rate.

This is the second method, government intervention in the market.

In addition, this imbalance is related to the international balance of payments. If the international balance of payments is in surplus (for example, China's current account has been in surplus for a long time, and the capital account has also been in surplus), the market will The supply of U.S. dollars will exceed demand, the U.S. dollar will have depreciation pressure, and the RMB will have appreciation pressure. If the government does not want the RMB to appreciate, it must intervene in the foreign exchange market, buy U.S. dollars, and accumulate foreign exchange reserves.

If there is a deficit between the current account and the capital account, or there is a deficit in the balance of payments, and the demand for U.S. dollars is greater than the supply of U.S. dollars, the central bank will have to put U.S. dollars into the market to keep the exchange rate at the level it wants to maintain. to consume foreign exchange reserves.

For example, assume that the equilibrium exchange rate of the US dollar against the RMB is 6.2, but the government wants to set the exchange rate of the RMB against the US dollar at 6.8, which is where the green line above is. At this time, the market The supply of dollars exceeds demand. Once the supply of cabbage on the market exceeds demand, the country needs to buy cabbage. Similarly, when the supply of U.S. dollars exceeds demand, the central bank needs to intervene. In order to prevent the U.S. dollar from depreciating (that is, allowing the RMB to appreciate), the central bank needs to buy U.S. dollars, thus increasing foreign exchange reserves.

There may be another situation, assuming that the equilibrium exchange rate of the US dollar against the RMB is still 6.2, but the central bank wants to set the exchange rate at 6 RMB for 1 US dollar. The U.S. dollar is so cheap, everyone will definitely want to exchange it for U.S. dollars. In this case, the central bank wanted to maintain the exchange rate at the level of 6 yuan for 1 U.S. dollar. We can only continue to put dollars into the market, which may lead to a reduction in foreign exchange reserves. This is just like in order to lower the price of cabbage, the country needs to continuously put cabbage on the market.

The green arrow on the right side of this picture goes down, which means the dollar appreciates, and goes up, which means the dollar depreciates. The higher the number, the cheaper the RMB. According to the picture above, everyone can use the simplest supply and demand relationship to think about how the RMB exchange rate is determined.