In recent decades, the Chinese authorities have been promoting market-friendly reforms to improve the flexibility of the exchange rate. Since 2016, the People’s Bank of China has made a concerted effort to withdraw from daily interventions in the foreign exchange (FX) market and has significantly enhanced the flexibility of the RMB exchange rate. Looking ahead, it is in China’s interest to further increase exchange rate flexibility and ultimately establish a floating exchange rate regime, which will lay the foundation for its further opening of the capital market and will pave the way for the internationalization of the RMB. Nevertheless, greater exchange rate fluctuations associated with a flexible exchange rate may have adverse impacts on the profits of exporters and importers and may increase the vulnerability of companies with large foreign debt exposures. This partly explains some emerging market economies’ reluctance to convert to a floating exchange rate regime. International experiences suggest that it is crucial for a country to establish a FX derivatives market with sufficient depth and liquidity in order to successfully move toward a floating exchange rate regime while ensuring economic and financial stability. Although China has made great strides in developing its FX derivatives market in recent years, it still lacks an onshore FX futures market which typically forms a critical component of a well-functioning multi-layered FX market. Therefore, the FX derivatives market in China needs to be further developed in order to fully support a floating exchange rate.