Zhu Mengnan, Sun Chengzhi
Studies of International Finance. 2026, 0(9): 76-91.
In the context of building a strong financial system and a modern central banking system, managing exchange rate expectations has become increasingly vital for maintaining financial stability. The People's Bank of China（PBOC）relies on communication as a key policy tool, with the quarterly Monetary Policy Implementation Report serving as the most authoritative and comprehensive channel. However, previous studies largely focus on the appreciation/depreciation bias of communication, overlooking the rich informational content embedded in the narrative. This paper aims to identify the theme structure of exchange rate communication in the Reports and examine the distinct information effects on expectation guidance.
Using the Latent Dirichlet Allocation（LDA）model on the Reports from the 2005 exchange rate regime reform to the second quarter of 2024, this paper discovers that the exchange rate‑related narratives cluster around two broad themes: market operations and exchange rate policy. The emphasis between these themes varies over time in response to domestic and external shocks. To quantify the information conveyed by each theme, this paper employs sentiment analysis based on a financial sentiment dictionary to measure the information content related to market operations, and a cosine similarity approach that accounts for accumulated prior communication to capture incremental policy information.
Using an EGARCH model with daily data on 1 to 12 month non‑deliverable forward（NDF）rates, this paper finds that both types of information significantly guide expectations towards RMB appreciation, with stronger effects on longer maturities. The mechanisms, however, differ markedly. Market operations communication boosts market confidence in the RMB and reduces exchange rate policy uncertainty, whereas policy communication, although reducing uncertainty, triggers risk-sensitive market sentiment—possibly because it signals underlying depreciation pressures. Furthermore, the effectiveness of these two channels is state‑dependent. After the“8·11”exchange rate reform in 2015, which enhanced the market determination of the RMB, the expectation guidance effect of market operations information strengthened, while that of policy information weakened. During periods of US Federal Reserve quantitative easing, characterized by abundant global liquidity and capital inflows, policy communication becomes more effective in guiding expectations, whereas market operations information loses some potency.
In addition, the results show that the semi‑annual Balance of Payments Report and oral communications play supplementary roles, but their lower frequency or information density limits their policy responsiveness. Robustness checks, including replacing NDF with deliverable forward rates, excluding the early reform period, and jointly estimating both information types, confirm the reliability of the findings. These findings make three contributions. Firstly, this paper moves beyond the unidimensional bias‑based approach and reveals the multi‑dimensional informational structure of exchange rate communication. Secondly, the differentiated mechanisms and state‑dependent effects provide actionable insights for the PBOC to tailor its communication narrative under different market conditions. Thirdly, the text‑based identification strategy adopted in this paper offers a transferable framework for studying the information effects of central bank communication in other policy domains.
