We can cognize from the predating treatment and analysis that the motions of a state ‘s currency exchange rate will do the ups and downs of the state ‘s import and export trade good monetary values, therefore this will impact the overall monetary value degree of this state. In the 1990s, China ‘s exchange rate system was a dual-track exchange rate system including the official exchange rate which is determined by the pecuniary governments and the swap exchange rate used in the foreign exchange barter market which is chiefly determined by the market forces. The official exchange rate is chiefly based on the U.S. Dollar as the mention criterion.
We can see from the Figure 3.3 that in the January the first 1994, RMB exchange rate and RMB swap exchange rate have combined into one exchange rate, RMB exchange rate depreciated from 5.796 to 8.618. Then, from 1994 to 1996, the nominal exchange rate of RMB against U.S. Dollar has appreciated by around 4 % . In add-on, after China ‘s exchange rate reform in July the twenty-first 2005, the nominal exchange rate of RMB against U.S. Dollar has appreciated by around 3 % .
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Figure 3.3 1994-2011 RMB nominal exchange rate alterations tendencies
Beginning: the National Bureau of Statistics of China web sites ( www.stats.gov.cn )
Conversely, the development state of affairs of the trade good monetary value in China was the another sort of tendency ( see figure 3.5 ) . From 1990 to 2000, China ‘s economic system has experienced a comparatively complete economic rhythm. The rising prices rate in China before 1993 was comparatively modest, nevertheless, after 1993, the rising prices was aggravated because of the rapid addition in the domestic investing and recognition, the mean CPI in 1994 has risen by around 9 % compared with the las twelvemonth in 1993.
However, since the terminal of the 1994, the economic system began to bit by bit decelerate down, so the rising prices rate has been decreased significantly in the subsequent two old ages. The rising prices rate has fallen to below 8.5 % in 1996, in add-on, in 1997, the rising prices rate has farther fallen to 2.8 % . So after 1997, China began to come in a deflation period, the CPI in both 1998 and 1999 has decreased by 3.5 and 0.6 per centum point severally. Meanwhile, from 2000 to 2005, China ‘s trade good monetary value has remained comparatively stable. However, since the 2nd half twelvemonth of the 2006, the rising prices rate in China began to farther accelerate one time once more.
We can see from both the Figure 3.4 and Figure 3.5, the Figure 3.4 shows the development tendencies of the rising prices rate in China since the 1990s and Figure 3.5 shows the development tendencies of the consumer monetary value index ( CPI ) in China since the 1990s. If we compared the Figure 3.4 with Figure 3.5, we can happen out that the tendency of alterations in consumer monetary values index has ever been consistent with the tendency of alterations in the rising prices rate. So that means with the invariably changing of the domestic rising prices rate in China, the domestic trade good monetary value degree is besides altering invariably.
Figure 3.4 1994-2011 The one-year rising prices rate motion tendencies in China
Beginning: From the Statistical Yearbook of China on the National Bureau of Statistics of China web site.
Figure 3.5 1994-2011 The one-year consumer monetary value index alterations tendency in China
Beginning: The statistical information from the NBSC functionary web site
In add-on, we can cognize from some economic theories that the devaluation of the currency will non merely take to the rise of the monetary value but besides sometimes will hold a function to control the rise of the monetary value. The grounds can be summarized as follow:
Because on the one manus, the devaluation of the currency enables the unreasonable monetary value system to be given to be more sensible, advancing the efficient allotment of the resources, bettering the usage efficiency of the resources and supply and demand conditions. This can eventually assist to cut down the monetary values.
On the other manus, the devaluation of the currency will do the addition of the export and the lessening of the import, so this can advance the better development of some domestic industries and this eventually farther better the profitableness of these industries. This will eventually take to the addition of the domestic entire supply and will eventually relieve the contradictions between supply and demand. So the trade good monetary value degree will worsen eventually.
Some economic experts have besides analysed the relation between the exchange rate motions and rising prices. Febanson ( 2001 ) thought that after the eruption of Southeast Asiatic fiscal crisis in 1997, because the motions of the RMB exchange rate chiefly peg to the U.S. Dollar, nevertheless, the U.S. Dollar has appreciated after this fiscal crisis, so RMB has really appreciated compared with the currencies of China ‘s some other trading spouses. Bason ( 2003 ) farther pointed out that the grasp of the RMB will cut down the growing of exports and impact the development of the domestic economic system. This concluding consequence will impact domestic entire demand and eventually take to the deflation. So harmonizing to the analysis from Bason ( 2003 ) , it can further explained that the cut in the RMB exchange rate will take to the addition in the domestic monetary values of the import and export goods and eventually will take to the rise of the domestic overall monetary value degree. Yan Bin ( 2006 ) besides thought that the grasp of RMB exchange rate will impact domestic overall trade good monetary value degree and the concluding consequence will take to the addition in the cost of the foreign direct investing ( FDI ) , so it will impact the enthusiasm of the foreign investing.
Therefore, harmonizing to the analysis about the relation between exchange rate motions and the trade good monetary value relation in China and besides the bing theoretical research from other economic experts, we can cognize that the impact of RMB exchange rate motion on the trade good monetary value is chiefly reflected on the motion of import and export trade good monetary value and the alteration in the cost of foreign direct investing. The RMB exchange rate motions will straight impact import and export points and investing points which constitute the GDP.
3.3.4 The sum-up and decision
Harmonizing to the choice and analysis of the chief variables of the RMB exchange rate motions on Chinese economic system, we can acquire the existent relationships between the RMB exchange rate motions and these economic variables. The decisions are as follow:
The impact of RMB exchange rate motion on China ‘s economic system is chiefly reflected on import and export trade and foreign direct investing. RMB exchange rate depreciation will hold a really important betterment on the import and export in the long term, although the depreciation will hold a certain negative impact on the import and export in the short term, because this is what we call the J-curve consequence. At the same clip, the depreciation of the RMB exchange rate can advance the FDI in the short term, but the fluctuation of the existent exchange rate will hold a negative impact on the investing assurance of the FDI so that this will take to the fluctuation or even lessening of the sum of FDI.
On the other manus, the RMB exchange rate motions will impact the monetary value of import and export goods and besides the alteration in the cost of the FDI chiefly by the relation of the trade good monetary value, the concluding consequence is that this will straight impact both the import and export points and the investing point which constitute the GDP.
Harmonizing to our analysis above, because exchange rate motion will impact the economic system chiefly through trade good monetary value relation, nevertheless, the trade good monetary value will impact the economic system chiefly through the impacting import and export trade and besides foreign direct investing ( FDI ) , so exchange rate will impact import and export trade and FDI chiefly by trade good monetary value relation.
Therefore, this article will merely see the direct impact of the trade good monetary value relation on the import and export trade and FDI besides. So this article will chiefly see the following two variables in the empirical research in the following chapter: 1.The import and export trade 2. The foreign direct investing ( FDI )
Chapter 4: The RMB Exchange Rate Movement and The Open Macroeconomic Model Theory ( The Empirical Analysis )
4.1 The debut for this charpter
After mentioning both domestic and foreign relevant theoretical and research literatures, the old chapter has done both theoretical and experiential analysis to analyze the impact of RMB exchange rate motions on China ‘s economic system harmonizing to the unfastened macroeconomic theoretical account and eventually selected appropriate economic variables. This chapter will construct a theoretical account based on the footing of this theory in order to analyze the extent of the consequence of RMB exchange rate fluctuations on China ‘s economic system through these selected economic variables.
4.2 The thought and idea of the empirical analysis
This empirical analysis will be chiefly based on the statistical degree to analyze the consequence of RMB exchange rate motion on China ‘s economic system. This article will chiefly concentrate more on the realistic and economic significance behind the this empirical theoretical account instead than merely concentrating on the theoretical account itself. That is the chief focal point of this empirical analysis.
4.3 The thought of patterning
First, we will see and analyze the following two chief economic variables which will be affected by the motion of the exchange rate. Because the motion of exchange rate can impact the economic system chiefly through the two economic variable. So the two variable we will chiefly concentrate on are as follow: 1. The import and export trade
The foreign direct investing ( FDI ) . Then, we will see the foreign trade multiplier consequence. Finally, we will construct a theoretical account about the impact of economic variables on the GDP chiefly based on the these economic variable we have mentioned above.
In add-on, we will besides analyze the influence coefficients of the motion of the exchange rate to the assorted economic variables in the theoretical account. Finally, we will replace these coefficients into the theoretical account to cipher the consequence of exchange rate on the national economic system.
4.4 The auxiliary account about the selected indexs and informations
4.4.1 The debut to this portion
Harmonizing to the theoretical and experiential analysis in the old several chapters, we can happen out that the motion of the exchange rate will hold a important impact on the economic system. While the chief focal point of this chapter will concentrate on the undermentioned two jobs: 1. Whether this sort of consequence will be or non in world. 2. What is the influence grade of the motion of RMB exchange rate on China ‘s economic system.
The theoretical account chiefly examines the consequence of RMB exchange rate motions on both import and export trade and foreign direct investing ( FDI ) so that we can cognize the exact influence grade of the RMB exchange rate motions on China ‘s economic system through the alterations in both import and export trade and FDI due to the motions of RMB exchange rate.
Before get downing to construct up the specific theoretical account, we must foremost hold a elaborate account to several of import indexs which are closely related to our mold.
4.4.2 The choice of existent effectual exchange rate
The nominal effectual exchange rate means “ the unadjusted leaden mean value of a state ‘s currency relation to all major currencies being traded within an index or pool of currencies. If the nominal effectual exchange rate does non see the rising prices factors, so, we can acquire the existent effectual exchange rate of this state.
Normally, the rise of the existent effectual exchange rate means the rise of comparative value of this state ‘s currency, conversely, diminution means the depreciation of this state ‘s currency. Meanwhile, existent effectual exchange rate is non merely related to the nominal exchange rate but besides is closely related to the rising prices rate. The RMB existent effectual exchange rate is the composite index that can reflect the overall fight and existent buying power of the RMB in the international trade. This article will chiefly mention to the RMB existent effectual exchange rate informations published by the Bank for International Settlement.
4.4.3 The choice of economic informations
This article will chiefly mention and follow the day of the month from 1995 to 2011. In add-on, we will besides take GDP as our chief economic index because GDP index is one of the most representative economic indexs.
As for the chief beginnings of our chief economic indexs and informations, it can be listed as follow: 1. From Bank for International Settlement 2. The Statistical Yearbook of China from the National Bureau of Statistics of China functionary web site. 3. Statistic Datas from The People ‘s Bank of China. 4. The Economic Yearbook of China.
4.5 The mold and empirical analysis
4.5.1 The debut to this portion
The motion of exchange rate will impact the GDP and the national income foremost through impacting import and export trade and foreign direct investing ( FDI ) so that it will eventually impact the economic development. But the trade good monetary value relation will straight impact the net export point and the investing point which constitute the national income and GDP chiefly through impacting the monetary value of import and export goods and besides the alteration in the cost of the FDI.
Therefore, this article will straight see the import and export trade and FDI as the two chief economic variables and will non see other variables factors. Following, we will construct up the theoretical account of the consequence of exchange rate motion on the national income.
4.5.2 The mold
Harmonizing to the unfastened macroeconomic theory, the national income equation can be expressed as follow:
Y=C+I+G+ ( X-M ) ( 1 ) ( Y is national income or GDP, C is ingestion, I is investing, G is authorities outgo, X is export and M is import )
Then, harmonizing to Keynes ‘s ingestion map theory, we can acquire the ingestion map expression: C= a + bY ( 2 ) ( a is independent ingestion, B is fringy ingestion leaning )
In add-on, we can besides acquire the import map expression: M=M0 + mY ( 3 ) ( M0 is independent ingestion, m is fringy import leaning )
So harmonizing to the expression ( 1 ) , ( 2 ) and ( 3 ) , we can acquire the expression ( 4 ) , it is shown as follow:
Y= ( a+I+G+X-M0 ) ( 4 ) , after cipher the clip derivation of both sides of the equation, we can acquire the eventually equation, it is shown as follow:
( 5 ) ( =dY/dT, T is clip )
Harmonizing to the elaborate analysis in the old several chapters, we know that the motions of the exchange rate will impact the economic development chiefly through import and export trade and foreign direct investing. So it means that the motion of exchange rate will chiefly take to the motions of the export, import and besides the Foreign direct investing. In add-on, the alterations of the three factors will impact the national income Y through the foreign trade multiplier eventually. So the relation beween the motion of exchange rate and the motion of both the import and export and FDI can be briefly summarized as follow:
, , ( is the motion of the exchange rate, ( dE/dT ) ) , ( is the motion of export, ( dX/dT ) ) , ( is the motion of import, ( dM0/dT ) ) , ( is the motion of foreign direct investing, ( dF/dT ) ) , FDI has accounted for a really big proportion in the entire investing, so here we chiefly consider the FDI.
So harmonizing to the analysis above and the expression ( 5 ) , we can acquire the equation of the consequence of the exchange rate motion on the national income:
= ( -+ ) ( 6 ) = ( -+ ) ( 7 ) ( , and stand for the growing rate of the national income, export and foreign direct investing severally, and represents the motion of the independent import. In add-on, , and stand for the proportion of the import, export and foreign direct investing in the entire national income Y or GDP severally ) . The equation ( 7 ) represents the consequence of the motion of assorted constituents in this
equation on the entire national income Y. So it means every clip when the exchange rate alterations, so the export, import and foreign direct investing will besides alter, , severally and the motions of the three variables will take to a farther motion in the national income Y through the foreign trade multiplier eventually.
Therefore, harmonizing to the analysis above, we can cognize that if we want to cognize the consequence of the RMB exchange rate motion on China ‘s economic system, We should foremost cognize, and, the three variables are three unknown coefficients that we have to cognize. They represent the growing rate. So in the following subdivision, we will make the empirical analysis to analyze the correlativities between the exchange rate motions and assorted economic variables.
4.5.3 The empirical analysis
In this portion, we will make an empirical analysis to analyze the correlativity between the motions of the exchange rate and the assorted economic variables and seek to analyze the coefficients before every economic variables in the equation ( 7 ) .
Following, we will make an empirical analysis to analyze the relationship between the variables, , and the RMB exchange rate. Harmonizing to the bing theory footing, we will foremost construct up the empirical equations ( the export, import and foreign direct investing equations ) :
In ( X ) T = a0 + a1 In ( REER ) T + a2 In ( YS ) T + uT ( 8 ) ( X is the existent emport volume in China ) ( export equation )
In ( M ) T = b0 + b1 In ( REER ) T + b2 In ( Y ) T + uT2 ( 9 ) ( M is the existent import volume in China ) ( import equation )
In ( F ) T = c0 + c1 In ( REER ) T +b2 In ( YS ) T + uT3 ( 10 ) ( F is the existent foreign direct investing in China and YS is the existent GDP in U.S. ) ( foreign investing equation )
( 1 ) Empirical analysis informations beginning and account
Before we begin to analyze, we will advert and name all the information we will utilize to make our empirical analysis, you can see the tabular array 4.1 below, they are as follow:
Table 4.1 The list of the needed informations for the computation of coefficients from 1995 to 2011
Export Total Volume
in China ( X )
Import Total Volume
in China ( M )
Entire Volume in China ( F )
GDP ( Y )
GDP ( YS )
RMB Real Effective
Exchange Rate ( REER )
Beginning: from The bank for international colonies ( BIS ) , The Statistical Yearbook of China from the National Bureau of Statistics of China web site and authoraa‚¬a„?s computation.
Note: All this informations are existent informations, for illustration, the GDP information is the existent GDP after computation, it is non the nominal GDP 2. The unit of the informations are in one hundred million U.S. Dollar.
First, we will make the stationary trial because many macroeconomic clip series informations are non stationary harmonizing to the many dynamic surveies. So we have to make the stationary trial foremost. We will make the stationary trial to the clip series foremost before we begin to make the cointegration trial. If the information is non stationary, we have to make the difference to do the information stalls. This article will utilize EG method to make a cointegration trial.
The commonly method used to analyze the stableness of the clip series is the ADF method ( The Augmented Fuller Test ) , we will utilize this method to analyze the stableness of the variables. We will make the unit root trial foremost.
We will utilize the empirical informations above ( see table 4.1 ) and follow Eviews6.0 package to prove the following variable: In ( X ) , In ( M ) , In ( F ) , In ( Y ) , In ( YS ) . The consequences shows that other several variables are all non-stationary series except the In ( F ) . So we have to make the first-order difference trial and analyze the unit root of the first order difference of the variables series. The consequences shows that after the first-order difference of our variable series, the variables series become stable. ( see the trial consequences below )
Table 4.2 Variables unit roots trial ( ADF ) consequences
( Significance Level )
Note: 1. * and ** denote at 1 % and 5 % significance degrees severally. 2.the pick of the slowdown order is harmonizing to the AIC rule 3. means the first-order difference of the variables.
( 3 ) Cointegration trial
In order to avoid the specious arrested development, we have to make a cointegration relationship trial to the theoretical account we build, the aim is to analyze whether there is a long-run stable relationship among variables. So we will make a unit root trial to the remainder of the arrested development equation. In fact, if the residuary sequence of the arrested development equation is stable, so this set of variables will surely be a cointegration relationship.
The export and RMB existent effectual exchange rate cointegration analysis
We choose the China ‘s existent export ( In ( X ) ) as dependent variables, we choose RMB existent exchange rate ( In ( REER ) ) , the existent GDP in U.S. ( In ( YS ) ) as independent variables. Then we will utilize Eviews6.0 package and follow OLS method to construct the export arrested development equation. The estimated export arrested development equation is as follow:
In ( X ) T = – 22.6500 – 1.8149In ( REER ) T + 3.7139In ( YS ) T ( 11 )
T value trial: ( -13.8050 ) *** ( -6.0137 ) *** ( 34.920 ) *** ( *** denote significance at 1 % degree ) , so we can acquire R2 = 0.9615, F-statistics = 611.0769. So we can acquire the D.W=1.1249 & lt ; 1.13 & lt ; 2, so it means the equation ( 11 ) exists positive autocorrelation.
Following, we have to extinguish the sequence autocorrelation for the equation ( 11 ) , we use Eviews 6.0 and follow Durbin-Watson two-step method to acquire the undermentioned equation:
In ( X ) T = -22.4170 – 1.8559In ( REER ) T + 3.7105In ( Ys ) T + 0.4101Lar ( 1 ) ( 12 )
T value trial: ( -7.7370 ) *** ( -3.7050 ) *** ( 21.6439 ) *** ( 2.9650 ) ** ( *** and ** denote the significane at 1 % and 5 % degrees severally )
So we can acquire R2 = 0.9671, F-statistics = 456.0299
Then harmonizing to our computation based on the Eviews 6.0, we can acquire D.W=1.85.
So after we have done a unit root trial to the remainder of the equation ( 12 ) , at the 1 % significance degree, the ADF value of the remainder for the equation ( 12 ) is – 5.5829, so the ADF value is less than the critical value – 3.5678 at 1 % significance degree. So the residuary sequence does non be the unit root, so the sequence is stationary sequence. So equation ( 12 ) is cointegration equation.
The import and RMB existent effectual exchange rate cointegration analysis
We choose the China ‘s existent import ( In ( M ) ) as dependent variables, we choose RMB existent exchange rate ( In ( REER ) ) , the existent GDP in China ( In ( Y ) ) as independent variables. Then we will utilize Eviews6.0 package to construct the import equation:
In ( M ) T = 2.3330 – 1.3896 In ( REER ) T + 1.3110In ( Y ) T ( 13 )
T value trial: ( 0.7119 ) *** ( -1.9807 ) *** ( 13.2137 ) *** ( *** denote the significance at 1 % degree ) .
So we can acquire the R2 = 0.7826, F-statistics = 88.1500, So D.W = 1.9471
Therefore, after we have done a unit root trial for the equation ( 13 ) , we find out that the ADF value of the remainder for the equation ( 13 ) is -4.6570, ADF value is less than the critical value -3.5722 at the cubic decimeter % significance degree. So the equation ( 13 ) is cointegration equation.
The foreign direct investing and RMB existent effectual exchange rate cointegration analysis
Harmonizing to the empirical research from this article, we can see the consequence of the motion of the RMB existent effectual exchange rate on the FDI is non really important.
we can compare comparison and analyze the relation between the motion of the RMB exchange rate and the motion of the FDI entire volume and happen out that the consequence is non really important in the normal status ( see the table 3.4 above ) . So here we set the influence coefficient of the consequence of RMB existent effectual exchange rate motions on the FDI as nothing ( =0 ) .
So harmonizing to the equation ( 12 ) and equation ( 13 ) , we can acquire the coefficient in forepart of the In ( REER ) in the export equation is -1.8559aaˆ°E†-1.86 and the coefficient in forepart of the In ( REER ) in the import equation is -1.3896aaˆ°E†-1.39. So this consequence is consistent with the research from other economic experts like Yan Cai and Wu Li ( 2004 ) , they found out that the relation between the RMB exchange rate and both import trade and export trade are negatively correlated. So every clip when the RMB existent effectual exchange rate rises, both the import and export trade lessening. Conversely, if RMB existent effectual exchange rate diminutions, so the import and export trade rise.
So we have got the several necessary coefficients harmonizing to the empirical analysis. The consequences of the computations after our empirical analysis are as follow:
= -1.86, = -1.39 and =0 ( Note: the several coefficients reflect the dealingss between the motion of the RMB exchange rate and the motion of the several chief economic variables, the economic variables include import, export and FDI ) .
In add-on, after the Cointegration trial, we should besides can make an Granger causality trial to the equation which exists a cointegration. And here what I want to advert is although we have used some package to cipher our informations and coefficients, but it still likely has some computation mistakes for the information we have calculated above. But we have already seek our best to do it to be more accurate.
Final consequence computation
Table 4.3 The computation of foreign trade multipliers
Propensity ( B )
Propensity ( m )
Beginning: The Statistical Yearbook of China from the NBSC web site, the informations published by the People ‘s Bank of China web site and writer ‘s concluding computation.
Note: 1.All the informations are based on the information from 1994 as the base period. 2. The unit of the GDP, ingestion and import volume are in one hundred million RMB.
First, harmonizing to the tabular array 4.3 above we can cipher the foreign trade multiplier ( 1/1-b+m ) , harmonizing to the mean fringy ingestion leaning 0.562 and the mean fringy import leaning 0.329 from 1995 to 2011 in China, we can acquire the mean foreign trade multiplier 1.590.
Following, we will cipher the each proportion that import, export and FDI has accounted for severally in the entire GDP. You can see the tabular array 4.4 below. Harmonizing to the import entire volume and export entire volume informations that we have got in the old several chapters and besides the FDI entire volume and the nominal GDP information we have got from the 2011 Statistical Yearbook of China. We calculate the entire proportion of export volume, import volume and FDI volume severally in the entire GDP. The consequence is as follow:
Table 4.4 The entire proportion of the export, import and FDI severally inGDP
The proportion of
entire export volume in entire GDP ( % )
The proportion of
entire import volume in entire GDP ( % )
The proportion of
entire FDI volume
in entire GDP ( % )
Beginning: The 2011 Statistical Yearbook of China and writer ‘s computation.
We can see from the tabular array 4.4 that since 1995, the mean proportion of export entire volume in the entire GDP in China is 24.9 % , the mean proportion for import entire volume is 21.5 % and the mean proportion for the FDI is 3.2 % .
So after we know all the required informations and coefficients, we can utilize to
equation ( 7 ) above to cipher the influence grade of RMB existent effectual exchange rate on China ‘s economic system. Harmonizing to the equation ( 12 ) and equation ( 13 ) , we know the dealingss between the motion of RMB existent exchange rate and the motions of import and export trade. Every clip when RMB existent effectual exchange rate rise by 1 % , so the import and export trade will diminish by 1.38 % and 1.86 % severally.
In add-on, harmonizing to the research in this article, because the impact of RMB existent effectual rate on the FDI is non important, so we can put the coefficient of the consequence of RMB existent effectual exchange rate on the FDI as nothing ( =0 ) . Finally, harmonizing to the equation ( 7 ) above, we can make the computation.
= ( -+ ) ( equation ( 7 ) )
we substitute these calculated informations and coefficients into the equation ( 7 ) and the consequence is shown as follow:
= 1.59* ( -1.86 % *0.249+1.39 % *0.215+0*0.032 ) = -0.261 % ( the concluding consequence )
Harmonizing to the computation above, we can cognize that influence grade of the motion of RMB exchange rate on China ‘s economic system through impacting the several chief economic variables like import and export trade and FDI. The concluding empirical analysis consequence is as follow:
Every clip when the RMB existent effectual exchange rate appreciates by 1 % , so the China ‘s economic growing rate will worsen by 0.261 % .
4.5.4 The restriction of our theoretical account
Harmonizing to the empirical analysis consequence, we know since 1995, when the RMB exchange rate rise by 1 % , the the economic system growing will drop by 0.261 per centum point. But in this theoretical account, we merely see several chief economic variables including import, export and FDI. But there are still many other possible economic and variables and factors we have non considered in constructing the theoretical account. In add-on, demuring the import and export trade and FDI which will straight impact the economic system, the trade good monetary value relation is besides an really of import factor that will indirectly impact the economic system. However, this article merely considers the indirect consequence of trade good monetary value on the growing of the economic system through straight impacting the monetary value of both import and export goods and the alterations in the cost of the FDI, but the trade good monetary value relation can besides indirectly affect the economic system through straight impacting other economic factors, but we have non considered the other economic factors that related to the motion of the trade good monetary value.
Meanwhile, this theoretical account has non considered the complexness of the external economic system yet. Sometimes some unpredictable factors from the external economic system can besides impact the economic system such as the instability of the fiscal system or the unfavourable outlooks and so on.
In add-on, in the mold procedure, this article chiefly adopts the unfastened macroeconomics theory cognitions and analyze the consequence of RMB exchange rate motions on economic system. However, we have non considered the opposite reaction of the economic consequence to the exchange rate. Sometimes the fluctuation of the economic growing will conversely impact the exchange rate besides. But this is what we have non considered in our theoretical account.
Finally, because China did non get down to carriy out the foreign exchange rate direction system reform until 1994. After this reform, China began to follow manageable and more flexible floating exchange rate based on the market supply and demand, so the scope of our informations will be chiefly based on the information from 1994 to 2011, so that is why the sample interval of our informations is comparatively shorter.So if the scope of our sample informations can be a small spot longer, the theoretical account consequence will be more precise.
4.5.5 The decisions and the practical significance
Harmonizing to the Keynesian macroeconomics theory, this article built a unfastened macroeconomic general theoretical account through import and export trade and FDI as the variables and analysed the influence grade of RMB exchange rate on China ‘s economic system. The research has shown that: to some extent, the China ‘s economic system has been affected by the motion of RMB exchange rate, although the consequence is comparatively little in the short term ( when the RMB existent effectual exchange rate rises by1 % , the economic growing in China diminutions by 0.261 % ) , but motion of RMB exchange rate will still hold a really great impact on the economic system sing some other factors in the long term.
As viewed from the realistic state of affairs, the velocity of the economic growing has significantly affected by the motion of the RMB exchange rate. Since 1994, the RMB exchange rate has already experienced three times comparatively significant fluctuations ( see the figure 4.1 ) .
Figure 4.1 1994-2011 The motion tendency of RMB existent effectual exchange rate
Beginning: The BIS and the National Bureau of Statistics of China functionary web sites
The relation between the first clip significant motion of RMB exchange rate from 1995 to 1998 and the alteration of the economic growing rate in China:
The first clip is from 1995 to 1998. after the eruption of the southeasterly Asiatic fiscal crisis, the currencies of many other Asiatic states began to devalue, but because of the promise from the Chinese authorities that RMB would non devalue, so the concluding consequence led to the grasp of the RMB exchange rate. RMB exchange rate has risen from 92.1 in 1995 to 114.7 in 1998. At the same clip, the economic growing in China has gone down from 10.9 % in 1995 to 7.8 % in 1998. RMB grasp led to the lag of the economic growing. So the depreciation of the RMB has stimulated China ‘s external demand and eventually promoted economic growing in China.
The relation between the 2nd clip significant motion of RMB exchange rate from 2002 to 2004 and the alteration of the economic growing rate in China:
The 2nd clip is from 2002 to 2004, during this period of clip, the U.S dollar has appreciated significantly, because the RMB is pegged to the U.S. Dollar, so RMB existent effectual exchange rate index has gone down quickly from 110.6 in 2002 to 100.5 in 2004 after the grasp of U.S. Dollar. Meanwhile, the economic growing rate in China has instantly gone up from 9.1 % in 2002 to 10.1 % in 2004.
The relation between the 3rd clip significant motion of RMB exchange rate since July 21 2005 and the alteration of the economic growing rate in China:
The 3rd clip motion began on July 21 2005 when China began to transport out a manageable floating exchange rate mechanism, which refers to a currency basket and based on the market supply and demand alternatively of
nail downing to the exchange rate of the U.S. Dollar. Then the RMB existent effectual exchange rate has risen quickly from 100 in 2005 to 121.9 in 2011. However, at the same times, the Chinese economic system was still maintaining turning progressively from 2005 to 2007. So the grounds can be summarized as follow:
First, it is because the gradual betterment of the fight of the export merchandises and the diminution of the replaceability of the export merchandises.
A big sum of international capital influxs has besides played a really of import function in advancing the development of China ‘s economic system.
However, after 2007, because of a really important rise of the RMB existent effectual rate from 105.6 in 2007 to 119.2 in 2009, so this led to a really crisp diminution in the growing of the China ‘s economic system from 13 % in 2007 to 8.7 % in 2009 ( see the figure 4.1 and 4.2 ) . And so, with a little diminution of the RMB exchange rate from 119.2 in 2009 to 118.7 in 2010. The economic growing rate has one time once more gone up from 8.7 % in 2009 to 10.4 % in 2010.
Figure 4.2 1994-2011 The alteration tendency of the economic growing rate in China
Beginning: Chinafinancialyst web site ( World Wide Web. Chinafinancialyst.com )
Note: The unit is per centum ( % )
So harmonizing to our analysis above, we can cognize that the consequences of our empirical analysis and the consequences of the world are fundamentally consistent. The relationship between the motion of the RMB exchange rate and the growing rate of China ‘s economic system is ever the antonym.
4.5.6 The sum-up
At the present phase, there are two chief jobs for the RMB, the first job is the progressively appreciation force per unit area of the RMB in the international market and the another job is the really high rising prices in China. In add-on, China ‘s domestic economic system has besides appeared a certain instabilities, the dependance grade of China ‘s economic system to the foreign trade has besides increased really quickly and the proportion of the family ingestion in the entire GDP has besides gone down bit by bit.
Therefore, we must stand on a new position to believe about the issue of China ‘s economic development. If we should promote to export the domestic merchandises who have a comparatively competitiveness advantage to alleviate the unnatural development of the China ‘s economic system who has a inordinate trust on the export or we should set the construction of the domestic economic system to a long-run and harmonious growing? In a comparatively more unfastened international economic system, the exchange rate has played a more and more of import function. So how to more efficaciously cover with the issue of China ‘s exchange rate will straight go a really of import factor that decides if the China ‘s economic system can hold a long-run and harmonious growing in the close hereafter.
The point of position of this article is that RMB should maintain suitably stable and should non hold a really significant accommodation. But China should set and reform the RMB exchange rate stableness mechanism so that China ‘s economic system can hold a long-run, rapid and more harmonious growing and development.
Chapter 5: The Recommendations and Restrictions
5.1 The debut to this chapter
Presently, the domestic rising prices in China has become progressively serious and the force per unit area of RMB exchange rate grasp has besides been increasing invariably in the international market. To some extent, the disadvantage of the RMB exchange rate grasp is more than the advantages of the grasp. But we can non deny that the RMB exchange rate should be given to appreciate in the long term. The earlier empirical analysis consequence in this article has shown that the little grasp of RMB exchange rate will non hold a really great impact on China ‘s economic system, but a important grasp of the RMB exchange rate may earnestly impact the stable and rapid growing of China ‘s economic system. So no affair viewed from internal or external force per unit area, RMB exchange rate reform one time once more is really indispensable. To keep the RMB exchange rate under a comparatively more sensible and balanced exchange rate degree is really of import to the rapid and harmonious development of China ‘s economic system.
5.2 The recommendations to turn to current RMB grasp issue
So harmonizing to the theoretical and empirical analysis, there are several helpful and good tips and recommendation we want to advert about the RMB exchange rate issues. So the recommendations of this article can be summarized as follow:
Appropriately increasing the imports of goods and upgrading the construction of the export goods
Presently, the bulk of Chinese export goods belong to the labor-intensive merchandises, the technological content of the merchandises is comparatively really low. In add-on, the net income border of these merchandises is besides really low. So in order to alleviate the force per unit area of the RMB grasp, China should beef up the support attempts to the import and increase the imports of cardinal raw-materials and energy, at the same clip, China should besides increase the import of the hi-tech equipment. This can non merely heighten China ‘s comprehensive national strength but besides can better the industrial construction, promote the ascent and optimisation of the construction of China ‘s export trade goods.
merely through continuously heightening the technological content and quality of the export goods, doing great attempt to develop hi-tech industries, China can better the overall fight of the domestic export goods and eventually alter China ‘s import and export trade construction. So in this manner, China can non merely heighten it ‘s overall export fight but besides can advance a more rapid and more stable development of the economic system so that this can eventually alleviate the negative consequence of the RMB grasp on the China ‘s export and economic system. Finally, this can besides assist to alleviate the RMB grasp force per unit area.
The appropriate accommodation of the export revenue enhancement policy in China
Another manner to alleviate the force per unit area of RMB grasp is to allow adjust and reform the export revenue enhancement refund policy in China. Since 2004, China has already implemented a great reform to the revenue enhancement refund policy and the revenue enhancement refund rate has decreased from 15 % to 10 % . The execution of this policy will to some extent bound China ‘s foreign trade and lower the growing velocity of the export. This is a exigency measures to alleviate the RMB exchange rate grasp force per unit area in the short term.
( 3 ) Strengthening the attempts of China ‘s outward foreign direct investing
Presently, there are still some mistake thoughts on the use of foreign capital in China as China merely encourages the capital influxs and limit the capital escapes. The concluding consequence led to a serious instability between foreign direct investing in China and China ‘s outward foreign direct investing. Therefore, promoting Chinese endeavors to beef up outward direct investing is one of the most of import ways to alleviate RMB grasp. because increasing China ‘s outward foreign investing will go a really of import step to equilibrate the supply and demand of the RMB.
Therefore, the Chinese authorities should make a favourable policy environment to actively promote and advance the attempt of the foreign investing of Chinese endeavors. For illustration, Chinese authorities can call off the audit of the hazard to the foreign exchange which will be used for the foreign direct investing. In add-on, the Chinese authorities can besides liberalise the limitations to the QFII in China who want to put their domestic capital to the abroad capital market. Because QDII can assist to alleviate the force per unit area of inordinate growing of Chines foreign exchange militias in the short term and let go of inordinate foreign exchange militias. So this eventually can alleviate the force per unit area of RMB grasp.
5.3 The brief sum-up of the restriction for this article
As we have mentioned the chief and elaborate restrictions of this articles in the old several chapters including the restriction of our methodological analysis, the restriction of our mold and so on. So here we merely want to briefly sum up the chief restrictions of this article eventually.
This thesis has several restrictions. First, because of a really limited research clip, our literature reappraisal can non see all bing and related theories. In add-on, Demuring the several chief economic variables we have choose including import and export trade, FDI and trade good monetary values, there are still tonss of other economic variables that will hold a really closely relationship to the RMB exchange rate and the RMB exchange rate can besides impact the China ‘s economic system through impacting these other economic variables that we have non considered when we are making a theoretical and empirical analysis in this article. Meanwhile, the scope of our sample informations interval is non really long besides, we merely concentrate on the sample informations from 1994 to 2011, so if so if the choice of our sample informations interval can be a small longer, the simulation effects from the mold will be likely to be better. Furthermore, as beginning of the information in this article is chiefly based on the official web sites of the authorities organisation and authorities studies, the job is there are still tonss of really utile information and information we can non obtain because these informations have involved in the national security and secrets. This leads that this article can non hold a more in-depth analysis. Finally, as the recommendation is merely a premise and suggestion based on the current state of affairs. So whether it will truly go on or non, no 1 will cognize. We merely can see what will go on in the close hereafter.