Research On The Effect Of RMB Exchange Rate Regime And Exchange Rate Behavior On Trade Balance From Country Perspective

The reform of the RMB exchange rate regime in July2005was closely connectedwith the trade imbalance of China at that time. After the exchange rate regime reform, theissue of trade balance effect has been attracting a lasting and extensive attention. To clearthe exact relationship between the exchange rate regime, the exchange rate behavior andtrade balance has a very important significance to amend and improve the exchange rateregime or to promote the trade equilibrium and to promote economic growth. This paperconsidered several problems that still needed further study in the related literature anddiscussed the effect of changes of the RMB exchange rate regime and exchange ratebehavior on China’s trade balance through theoretical analysis, historical analysis andempirical analysis from the perspective of bilateral trade. This paper also has given outsome proposals on improving the exchange rate regime, the adjustment of exchange rate,trade payments equilibrium and other issues based on the research conclusions under thecurrent exchange rate regime.First of all, the paper constructed theoretical analysis framework of exchange rateregime, exchange rate behavior and trade balance. Through the theoretical analysis, Theresults showed that the exchange rate regime mainly affected the trade balance through theexchange rate behavior. So it was reasonable to turn the study of relationship betweenexchange rate regime and trade balance to the study of relationship between exchange ratebehavior and trade balance. The results of study showed that the import price and exportprice were important bridges to link the exchange rate behavior and trade; the determiningconditions based on exchange rate elasticities and the conditions based on the priceelasticities of supply and demand had commonality, which laid a foundation for thesubsequent empirical analysis.Secondly, based on the historical analysis, the study showed the relationship of the RMB exchange rate regime and the trade balance and the Emphasis of merchants treat withthe exchange rate behavior varied according to the historical period. But, trade balance hasbeing always the import factor of the evolution of RMB exchange rate regime and theexchange rate adjustment. With the deepening of international economic relations,diversification of servicing objects of exchange rate policies and the influencing factors ofexchange rate has weakened the relations between exchange rate and foreign trade to someextent. However, under the market mechanism, as one of the main factors affecting importand export prices, exchange rate has been increasingly attached importance to by the microtrade merchants.Then, this paper analyzed the relationship between the exchange rate behavior andtrade prices. On the whole, Appreciation of RMB exchange rate would lead to increasingexport price rising and import price declining. Both import and export price would riseunder exchange rate fluctuation, but the influence degree of the exchange rate fluctuationon import and export prices was insignificant. The influence of the exchange rate behavioron import and export prices was lower than production cost. From the perspective ofbilateral trade, the influences of the RMB exchange rate behavior on import and exportprices were different. The paper considered the differences in passing degree as thereflection of exporter’s comparative advantages of resources and industry development andimporter’s comparative disadvantage of resources and industrial development.At the same time, this paper analyzed the effect of exchange rate behavior on tradebalance. Overall, the RMB exchange rate appreciation and exchange rate fluctuation wouldreduce the surplus. But the effect of exchange rate behavior was far from that of demandand cost on the trade balance, the effect of supply on exports was also bigger than theeffect of exchange rate behavior. From the adjustment from short-run deviation to long-runequilibrium of trade balance, correction period ranged from3months to18months. Fromthe path of balance after the impact of a standard deviation of exchange rate change, thenumber of trading partners about balance increasing and balance decreasing in short-termwas almost the same. The balance deterioration occurred within the first3months, and12months after the impact, the majority of the balances showed positive effects. From theperspective of import and export trade market distribution, degrees of China’s import andexport market dispersion were constantly increasing, and the degree of import marketdispersion was higher than the degree of export market dispersion. The effect on market dispersion of Exchange rate behavior mainly owed to that of exchange rate fluctuation. Asfluctuation increasing of the effective exchange rate, import and export market dispersionwould decline in different degrees.Then, this paper studied the relationship between the exchange rate adjustment andtrade payments equilibrium in current exchange rate regime. By adjusting the benchmarkrate, a basket of currency regime not only could keep RMB relative stable to the currencybasket, but also could realize the trade payments equilibrium. However, as opening toworld deeply, the diversities of service objects as well as the influence factors of RMBexchange rate made it inevitable that the real exchange rate would be deviated from theexchange rate aimed to payments equilibrium. But the importance of trade determined thepayments-equilibrium exchange rate would be an important reference, the RMB exchangerate could deviate from it, but couldnot get far away from it.Finally, according to the analysis, this paper considered that there would still be afoundation of RMB appreciation. Under this trend, the paper put forward four proposals onimproving RMB exchange rate regime and adjustment of trade balance of China based onthe research conclusions. First, RMB appreciation should be slowly so as to win the timefor the upgrading of export structure. Under the pressure of RMB appreciation, it shouldnot lnly promote trade equilibrium through exchange rate adjustment but also consider theinhibition of export competitiveness by appreciation. Second, it should slow the pace ofappreciation by promoting the capital flowed out. Third, it should improve the RMBexchange rate regime by improving the transparency of information gradually, expandingexchange rate fluctuation range and releasing intervention. Fourth, it should strengthen thecoordination of various measures to improve trade equilibrium.