Research On Policy Effects And Economic Impact Of RMB Exchange Rate Regime Reform

Over the past decade, export trade has always played an important role in China's economic development. In 2008, outbreak of the global financial crisis sharpened China's export trade severely, in order to alleviate unfavorable factors which affected economic development brought by the decline of exports, Our government had to re-pegged RMB exchange rate to the U.S. dollar temporarily. But dollar-pegged exchange rate regime made RMB face a new round pressure of appreciation, so that America did not hesitate to fight a trade war with China in order to force RMB appreciation, particularly under the current domestic political impact of the election. In essence, this debate about RMB exchange rate did not focus on the RMB exchange rate itself, but the RMB exchange rate formation mechanism. In fact, international community's criticism and question about the RMB exchange rate has not reduced or disappear, and it has been the focus of controversy of Sino-foreign economic circles after the reform of RMB exchange rate formation mechanism. People who commend it think that the RMB exchange rate formation mechanism is compatible with current needs of economic development, and achieved toward to a more freely floating exchange rate regime. People who criticize it think that de facto exchange rate regime of RMB does not change after reform of RMB exchange rate regime and RMB exchange rate is still seriously undervalued and manipulated.An important reason for the controversy is that we did not evaluate the reform of RMB exchange rate regime comprehensively and objectively. Many researchers will bring about the shortcomings of "Mangrenmoxiang" inevitably when talking about the RMB exchange rate regime. And many commentators did not give rigorous argument, demonstrated methods and process. We need re-examine the reform of RMB exchange rate regime is effective or not, and conduct an overall evaluation about it, especially when the current debate on the RMB exchange rate policy begins to heat up. Around the new reform of exchange rate regime, the main focus of our study is to reveal the "veil" of currency basket and the de facto exchange rate regime of RMB, and calculate the equilibrium exchange rate level of RMB and investigate that RMB exchange rate is manipulated or not, and investigate the relationship between RMB exchange rate policy and monetary policy and the influence of exchange rate fluctuation on China's trade, etc.This paper is organized as follows. Section 1 is preamble, introducing research background, purpose, approach, thesis structure, innovation and shortage. In the first chapter, this paper investigates the historical trajectory of the changes of RMB exchange rate and its formation mechanism by a historical perspective, and makes a brief analysis of economic background of the RMB exchange rate reform. In chapter 2,I investigate the de facto exchange rate regime of RMB based on the volatility of RMB exchange rate and foreign exchange reserves, in order to test the exchange rate regime whether changed significantly after the RMB exchange rate formation mechanism reform. Then in chapter 3, I reveal mysterious "veil" of RMB currency baskets by using weight infers method after the reform, including the composition of currency basket and its weights, etc. In the 4th chapter, I analyze the RMB exchange rate whether there is a serious underestimate and manipulation based on RMB equilibrium exchange rate and changes of the foreign exchange market efficiency. In Chapter 5,I analyze the mutual relations between the RMB exchange rate policy and monetary policy based on the real interest rate model after the reform, in order to test whether the existence of "triple paradox" or not in China at present. Chapter 6 as an extension of empirical analysis, I not only investigate the impact of RMB exchange rate fluctuations on trade of our country as a whole, different regions and China-US bilateral trade using time series and panel data, but also analyze other factors which affect China-US trade imbalances. Conclusions and direction for further research are given in chapter 7.Based on the above study, the paper gets several conclusions:First, the flexibility of de facto exchange rate regime of RMB increases greatly after RMB exchange rate regime reform, exchange rate regime is manifested mainly dirty floating exchange rate with the deepening of the reform. Second, despite the composition of currency basket of RMB and its corresponding weights is constantly changing, the weight of the dollar is declining in exchange rate basket, and other currencies also gained significant weights, which indicates that RMB currency basket regime has played a role. Third, based on RMB equilibrium exchange rate and analysis of the effectiveness of foreign exchange market, I find that RMB exchange rate does not be serious misalignment, and the overvalued and undervalued of exchange rate are alternating in sample period, in particular, RMB is overvalued in fact since the outbreak of global financial crisis. Fourth, although exchange rate regime reform improves the flexibility of RMB exchange rate, the reform does not reduce the mutual conflict between RMB exchange rate policy and monetary policy, the "triple paradox" problem still exists in our country because of the central bank's foreign exchange market intervention. Fifth, RMB appreciation reduces China's import and export trade at the same time, so it not only can't correct the trade surplus promptly but also generates different impact on different regions, and subject to other trade policies. RMB exchange rate is not the effective way of correcting China-US Trade Balance imbalance.The contributions of this paper include:First, this paper clarifies the debate on de facto exchange rate regime of RMB using relatively rigorous arguments, demonstrated methods and the process, and examines the dynamic composition of RMB exchange rate basket. Besides, I propose that we should re-examine the changes of RMB exchange rate regime by the perspective of effectiveness changes of RMB foreign exchange market. Second, the paper estimates equilibrium exchange rate of RMB by using different methods in order to analyze exchange rate misalignment comparatively, so it can avoid the limitations of a single method. I also re-examine RMB exchange rate whether exists manipulation or not by the perspective of effectiveness of foreign exchange market. Finally, I investigate the effects of the volatility of RMB exchange rate on our country as a whole and regional trade by using time series and panel data, and examine RMB exchange rate regime reform whether achieves the purpose of correcting the imbalance of international payments.