Time-Varying Exchange Rate Basket in China from 2005 to 2009

We use the Kalman filter to estimate the structure of the secret currency basket of the renminbi based on daily data between 2005 and 2009. The currency weights of selected currencies are modeled as stochastic processes (random walks). The official announcement of the new exchange rate regime in July 2005 with the introduction of a secret currency basket was followed by a smooth appreciation against the US dollar (USD). Other currencies did not play a major role. We show that the USD again received a higher weight in the Chinese exchange rate policy already before the financial crisis of 2008.