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Financial Markets Effects to China’s Economy

Author: TangHuaiLi
Tutor: WangLiHong
School: Dongbei University of Finance
Course: Western Economics
Keywords: Exchange rate International capital flow Exchange regime Fluctuation Appreciation &Inflation
CLC: F124
Type: Master's thesis
Year: 2011
Downloads: 74
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Abstract


This paper is about the interrelationship between financial markets and China’s economics. The importance of the relationship is obvious, in the light of the continuing frequent incidence of financial crises in individual countries. It begins with an assessment of the performance of financial markets in one of their main international functions-the international allocation of savings to productive investment opportunities, and how their performance has evolved in the light of developments over the past forty years, including the liberations of international trace and investment and the growth of the financial intermediation industry.This paper goes on to consider what are the remaining obstacles to market efficiency in the international arena. Those obstacles include official controls on capital flows, cultural and legal factors, and fears of monetary and financial instability. The paper focuses on the exchange rate issues and discusses the options facing monetary authorities in the context of current financial market conditions. These issues remain contentious, even though they have been debated for many decades, and the paper suggests that the choice among the various options depends on the microeconomic nature of the foreign exchange market, which has tended to change from time to time and will continue to change.The integration of the world economy through international capital movements has become closer since the 1960s, but not as much closer as might have been expected after the explosive growth in financial intermediation since the 1970s. Even in the 1990s, capital seems to have been much less mobile internationally than it was in the era of the gold standard in the late nineteenth and early twentieth centuries.There are several categories of reason for the less-than-complete integration. Official controls on capital flows have played a role, and although they remain in some countries, they are much less pervasive than in1960s and 1970s and the are mainly aimed at short-term flows. There are cultural and legal obstacles to international capital flows, and a continuing tension in many countries between domestic cultural sentiment and the interests of globalization; in recent years, however, the interests of globalization seem to have been gaining ground as its benefits have become more apparent.Nevertheless, fears of monetary and financial instability remain an important obstacle to international capital flows. The choice of exchange rate regime remains for many countries an unsolved problem, and the choices that countries actually make change surprisingly often. While floating exchange rates offer the reward of monetary policy autonomy, many fear that they also bring with them a degree of market-induced volatility.Discussion of exchange rate policies has tended too readily to neglect the microeconomic nature and behaviors patterns of the foreign exchange market, even though they have been subject to substantial change since floating exchange rates became widespread in the 1970s. This neglect may help to explain the failure of models based on macroeconomic fundamentals to explain exchange rate fluctuations ex post. Particularly for China as our economy develops more and more sophisticated in recent years, people often pay attention and speak of the exchange rate, RMB appreciation depreciation labor force financial supervision and so on. As china’s foreign trade becomes much larger and has more trade surplus, people wonder the reason why China has the tremendous trade surplus, it is the simply because sharp foreign trade expansion that brings the trade surplus or the international industry movement and modification that makes the current foreign trade surplus. When we look into it, it simply shows the superficial reason that is the product competitiveness which focuses on the lower price. Lower price inevitably involves the exchange rate regime which is the crucial content we will discuss in this paper. The concern and discuss on RMB exchange rate are pervasive and popular. Most of concerns ask for the appreciation and open the capital account and so on. So people wonder what the proper exchange rate is or what exchange rate regime should we take. This also matters on the future financial reform in China. When the large export continues the labor force doesn’t rise rapidly in the pace with city citizen wage lever, on the contrary rise very slowly. In the context of chaos discuss of appreciation from home and abroad we should keep calm and discern the result of appreciation and inflation for China. Which way we should take:appreciation first or inflation first then appreciation? This paper’s answer is that China should take loose monetary policy and inflation measure and then appreciate its currency and raise its labor wage lever as well. At the same time the government should improve the perfect its financial system which will discern the effective and ineffective investment and make the capital finance the most productive industry. This will make capital matches industry perfectly. Only by this can the financial industry develops in health and keeps our national macroeconomic control in high efficiency which will guide and instruct China’s economy development in health and efficiency.

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CLC: > Economic > The world economic profiles,economic history,economic geography > China's economy > Economic construction and development
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