| In the thirty-year process of China's reform and open, earth-shaking changes take place in economic field. The rapid increase of foreign trade denotes that international competitiveness increases, and at the same time this reflects the changes of financial variable money. But fictitious money is not equal to real trade, and they are influenced by exchange rate that is the ratio of domestic and foreign money. But fictitious money is not equal to real trade, and they are influenced by exchange rate that is the ratio of domestic and foreign money. From the establishment of China, exchange rate of RMB bears fluctuation, which is influenced by international economy and the need of self-regulation of economy. Especially after financial crisis of 1997, exchange rate is not the focus of foreign monetary policy. After several years of fixed exchange rate, People Bank announced that managed float exchange rate policy is employed in July 2005. In the past two years, exchange rate of RMB appreciated from 8.3 yuan to one dollar to 6.8 yuan to one dollar. In this period of time, it is more unilateral appreciation than floating.The dynamic change of any economic variable is influenced by many factors and influences many related economic variables. The balance of payment and foreign trade policy are the most important factors. The expansion of net export and FDI, which are the sensitive indicators of balance of payment, denotes that Chinese are rich, but the huge foreign reserve balance increases the issue of RMB. At the same time, the huge foreign reserve balance should be put into through financial assets such as bonds. But once the financial frame changes, the profit of creditor lost. Export of foreign trade policy is one of the three carts, and stable exchange rate system gives rational expectation to traders. But appreciation of exchange rate is a bad news for export and FDI, and the direct result is the slowdown of economy. The benefit of appreciation is decrease the consistent increase of net export and FDI, and decrease the consistent increase of foreign reserve. All above spur the government to regulate the development model of economic growth.From the historical and international experiences, the leading power always encounter the internal and outer expression of appreciation in the process of rapid growth, and different financial policies in dealing with appreciation lead to different results. In 1980's and 1990's, Japan encountered the similar condition. Pressed by the square agreement, Yen appreciated greatly. The central bank of Japan tried to intervene by monetary policy to prevent the slowdown of economic growth, which in turn incurred the inflation and babble economy. The appreciation of exchange rate leads to excessive fluctuation of exchange rate, and influences the redisposition of resources and then influence the consistent growth of output, so it is imperative to study the consequence of appreciation of exchange rate. Although current account has achieved the historic record since two years of exchange rate reform, FDI did not decrease and foreign reserves expanded consistently, and economic growth did not influenced by the above conditions. But this does not mean that the negative effect of appreciation on domestic economy is not exist, the stagnant effect will appear. Therefore, research on the influence condition of appreciation of RMB on the consistent stable development bears theoretical and real significance.Therefore, analysis on the effect factors of appreciation is help to understand unbalance of internal and foreign trade and cope with the contradiction between double favorable balances and unbalance exchange rate. At the same time, research on the PPP can probe into the transmission mechanism of economic fluctuation through exchange rate. Finally, the empirical research on the relationship between exchange rate and balance of payment is the basis of policy suggestion for the stability of macro economy and development of micro enterprises.The train of thought of this article is that, first probe into the development trend of exchange rate theory and exchange rate system, second comment on the development condition of RMB and changes of exchange system, third analyze the domestic and foreign effect factors of appreciation, fourth empirical test the PPP after appreciation of RMB and the effect relationship of exchange rate and balance of payment, finally provide policy suggestion. Although the economic phenomena on exchange rate are wide, this article is mainly about unilateral appreciation.This article employs the method of argument related theory first and empirical analysis on real condition consequently. This is beneficial to stress the test of empirical test and models on related theory and viewpoint. The specific contents are as follows.The first chapter is about the new development of exchange rate theory and development trend of exchange rate system. First, this article differentiate direct pricing and indirect pricing, nominal exchange rate and real exchange rate, equilibrium rate of exchange, exchange rate theory and exchange rate system, and exchange rate policy. Then, this article discusses exchange rate theory under gold standard, exchange rate theory under paper money standard, exchange rate theory based on financial market and exchange rate theory based on micro construction in chronological sequence. Finally, in view of history, this article sums up the history of exchange rate system, choice of exchange rate system, and comparison of current exchange rate system.This article grasps the current condition and development of exchange rate theory and system as a whole. This is important for related research as follows and for understanding.The second chapter discusses the development of RMB exchange rate and change of exchange rate system. This chapter introduces the development situation of RMB, such as planned period (1949-1979), export earning foreign reserves period (1980-1993), economic regulation period, post exchange rate reform (2005-). Then this chapter discusses the change of exchange rate system, such as exchange rate system under strict regulation, exchange rate system under bilateral exchange rate system, exchange rate after exchange rate incorporation and managed float exchange rate. Then this chapter analyzes the influence of fluctuation of exchange rate, such as effect on import and export, on attracting foreign reserves, on monetary policy and on inflation. Finally, this chapter discusses the intervene regulation of exchange rate, such as choice of intervene methods and regulation and reform of intervene methods.This chapter discusses the development history of RMB, and probe into the exchange rate system under different periods. This provides the basis for further research on effect factors and intervene methods of fluctuation of exchange rate.The third chapter analyzes the appreciation of RMB and domestic and foreign effect factors. First, this chapter summarizes the reference about appreciation of exchange rate and defects of exchange rate system. Then this chapter discusses the foreign influence of appreciation including political pressure and economic pressure, and domestic influence including irrational of economic construction and bilateral favor balance. And this chapter analyzes the negative and positive effect of appreciation.The goal of this chapter is theoretical analysis. Once gain the whole understanding, we have a definite object in view, because appreciation of RMB is the result of many variables. This is necessary for the empirical research.The fourth chapter studies the PPP after appreciation of RMB. This chapter uses unit root test and cointergration to test applicability of PPP in China. The empirical test approves that PPP exists in China to a certain extent. With the deepen of opening degree, market economic system consummates, then the effect of PPP in formation of exchange rate of RMB is more important, and equilibrium exchange rate regresses to the PPP. The fifth chapter discusses the effect on balance of payment. Through VAR impulse response and variance decomposition, this article probe into the relationship between growth rate of exchange rate and growth rate of export, growth rate of import, growth rate of foreign reserve and growth rate of FDI. The result indicates that the appreciation of exchange rate directly influence the change of export, import, foreign reserve and FDI, then influence the balance of payment. When China becomes an opening economic unity, keeping the balance of payment equilibrium is the internal need of macroeconomic external equilibrium. In this process, the effect of exchange rate system is important.The sixth chapter discusses the mechanism of appreciation on monetary policy. This article constructs monetary supply rate indicator and interest indicator. Through Granger causality test and discrete choice model, this article analyzes the sensibility. The empirical test approves that the relationship between exchange rate fluctuation and interest fluctuation embodies RIP. Although China employs fluctuating exchange rate pegging on a basket of currency, fluctuation of exchange rate still influence monetary policy.Through analysis on exchange rate theory and models, combined with empirical test of real situation in China, the main conclusions and innovations from empirical test are as follows.First, econometric test on PPP after new exchange rate policy draws the conclusion that PPP exists, and this provides reference for the further development of exchange rate.Second, based on the relationship between growth rate of exchange rate and growth rate of export, growth rate of import, growth rate of foreign reserve and growth rate of FDI, this reflects the dynamic cointergration relationship between exchange rate and balance of payment. This provides theoretic basis for improving bilateral favor balance.Third, through discrete choice model, this article approves that the relationship between exchange rate fluctuation and interest fluctuation embodies RIP. The relationship between the two provides reference for effective monetary policy under open economy.
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