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An Empirical Study on the Impact of RMB Exchange Rate Towards China’s Trade Balance

Author: HuYuanQing
Tutor: XuZuo
School: Nanjing University of Technology
Course: Business management
Keywords: exchange rate trade balance empirical study
CLC: F752.6
Type: Master's thesis
Year: 2012
Downloads: 101
Quote: 0
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As an important economic leverage,Exchange rate play the role of Price conversionin the international financial and trade activities,and have a profound effect on the internal andexternal balance of a country’s national economy. Traditional theory of the trade balanceadjustment claims that exchange rate affects a country’s trade balance adjustment. But thisregulation is not actually the same in the reality upon different countries,due to the differencesin socio-economic system and the exchange rate regime.Based on the two major issues as follows:whether the impact of RMB exchange ratetowards China’s trade balance is obviously? Why the trade surplus of China continuesexpanding with the pace of growing RMB exchange rate? With the combination of RMBexchange rate development since it’s reformation in1994and the progress of China’s tradebalance since China’s reform and opening up in1978,applying China’s FDI(Foreign DirectInvestment) and GDP (Gross Domestic Product) as intermediate variables included in thetraditional trade balance elastic analysis framework,this paper commissioned an empiricalstudy on the impact of RMB exchange rate towards China’s trade balance, build aCES(Constant Elasticity of Substitution) trade balance function and conduct an VAR(VectorAuto Regression) model,using time series analysis Method. Three major conclusionscombined with theoretical and empirical study are:First,RMB exchange rate does notsignificantly affect China’s trade balance in the short-term,the main effects comes fromChina’s trade balance itself. Second,there exists an co-integration relationship betweenChina’s trade balance and RMB exchange rate etc. in the long-term,but RMB exchange ratehave limited impact towards China’s trade balance and the impact also have lags. Third,Thetrade surplus of foreign-invested enterprise accounted for a large share of China’s trade surplus, increasing the difficulty of the Chinese trade balance adjustment to some extent.With the background that the shrinking external foreign trade demand situation Chinafaces because of more trade friction and protectionism,and the progress of RMB Yuaninternationalization,this paper proposes the following policy recommendations:first,China’sforeign trade surplus mainly affected by its own scale,China need to further change from themode of economic growth mainly depend on foreign trade to domestic demand. Maintainingthe development of China’s foreign trade balance and achieve China’s steady economic growthat the same time;second,in the long term,the impacts of RMB exchange rate towards China’strade balance grow gradually from strengthen to weakening,so called “anti-J-curve effect”.China should further improve the exchange rate regime and foreign exchange rate market;improve the supporting measures with exchange rate regime reform;last but not the least,because of the foreign trade surplus caused by FDI accounted a large part of China’s foreigntrade surplus,and create certain pressure on RMB exchange rate,China need to guide andimprove the access threshold FDI flow into China,while encouraging these capital to invest insome high-tech industries,modern services and environmental protection industries,and otheremerging industries.The innovation of this paper is,taking foreign direct investment as an intermediatevariable included in the traditional trade balance elasticity analysis framework constructedtogether with the exchange rate,trade balance and other variables,building an vectorautoregressive model,and extend it to the state space model for further empirical analysis theimpact of RMB exchange rate towards China’s trade balance from short-term and long-term.

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