The RMB exchange rate policy follows a “two-pillar” rule, with the market pillar reflecting foreign exchange market conditions and the basket pillar stabilizing the RMB index. This paper documents a clear pattern of regime-switching in the policy coefficients on the market pillar. And the regime-switching patterns are driven by macroeconomic variables, the intraday market condition as well as the news on trade conflicts. In a Markov-switching rational expectations model, we demonstrate that regime-switching rules expand the policy parameter’s space over which a unique equilibrium exists and the self-fulfilling depreciation is ruled out. Thus, this paper rationalizes the use of counter-cyclical factor— a policy tool proposed to stabilize the RMB exchange market.

Employing an event study approach on the US-China trade conflict, we find that Chinese listed firms with institutional investor holdings exhibit smaller announcement loss than their counterparts. We also examine the heterogeneous effects of firms. Specifically, the positive effect of institutional investor holding is larger for firms with foreign exposure or in provinces with higher degree of marketization. Besides, institutional investor holding also reduces firms' financial cost of refinancing and improves their long-run performance given the same announcement loss. These findings help understand the role of institutional investor in achieving financial stability from the micro perspective.