A Study On The Balanced Growth Effects Of The RMB’s Appreciation

The global financial crisis since 2008 has fully exposed the inherent defects of the imbalanced world economy, and in post-crisis period, the world economy has to suffer from a tough rebalance process. Under this background, the Chinese economy has entered into a new normal period. How to realize the benign interaction between the Chinese economic structural transformation and the corresponding financial system reform, and the question of whether or not can make China’s economy enter into a more balanced and more sustainable growth route through further market-oriented reforms have become the most concerned issues for the Chinese government and scholars both at home and abroad.Generally speaking, for those developed countries with perfect market system, those aggregate-level macroeconomic policies are more effective in solving aggregate imbalance problems, while those structural macroeconomic policies are often focused on adjusting the structural problems. However, for developing countries including China, as their domestic markets system are not fully developed, as well as the existing domestic regional disparities, those aggregate-level macro policies may have asymmetric effects, and therefore may be beneficial in solving structural problems. For China’s aggregate-level macro policy tools, the exchange rate system reform, as part of China’s monetary policy operating system, is simultaneously undertaking two roles, the first is as one of the most important market-oriented reform measures, and at the same time, it also acts as the short-term macroeconomic regulation and control policy. Therefore, how does it influence China’s balanced economic growth? Since restart of the RMB exchange rate reform in 2005, the RMB exchange rate reform is mainly manifest as the Yuan’s appreciation against the US dollar, thus, it is more essential for focusing its effects on China’s balance economic growth during the appreciation of the RMB. Since 2015, the market-oriented reform of RMB exchange rate has entered into a new historical stage, the empirical analysis of its effects on China’s balanced economic growth, not only is of great importance for China’s economic rebalancing policy implementation in the new normal period, but also is of significance for the theoretical progress for developing countries with economic transformation in an open macroeconomic environment.However, an objective analysis of the balanced economic growth effect of RMB appreciation needs to consider both the aggregate-level and structural-level problems. At the same time, during the process of the RMB exchange rate reform, Chinese government adjusted the step and speed of RMB appreciation due to the quickly changed environments of financial markets as well as macroeconomic environment both at home and abroad, therefore, enough attention should be paid to this problem. In addition, due to the transformation of China’s economic structure as well as the outbreak of the US subprime crisis in 2008 and its continual spread, the effects of RMB appreciation on China’s economy may show nonlinear mechanism characteristics. Therefore, empirical analyses based on related theories need to address the concerns of the above three aspects at the same time. However, the literature review in this thesis shows that the existing researches have failed to address all these three aspects. Therefore, their conclusions may have some herent limitations.This thesis first briefly described China’s economic imbalances both on the aggregate-level and structural-level. Based on the existing research literature, we put forward the transmission channels through which the change of exchange rate may affect the economy of developing countries both on the aggregate-level and structural-level, and utilize it as the theoretical basis for the following empirical analysis in this thesis. As the RMB exchange rate reform since 2005 have mainly behaved as Yuan’s appreciation against the US dollar with different speed. At the same time, due to the expectations of RMB appreciation, the large scale short-term capital flow had become a serious aggregate-level imbalance problem. What is more, regional output gap and regional industries output fluctuations have played particularly important roles in the structural imbalances of Chinese economy. Therefore, This article conducted its researches from the aggregate-level perspective of short-term capital flow, as well as the structural-level perspective of regional output gap and regional industries output fluctuations, and in order to capture the time-varying nonlinear mechanism, this paper utilize the MS-VAR model to analyze the balanced economic growth effect of the RMB appreciation. The main conclusions of this thesis are as follows:First, By using MS-VAR model, this paper examines the impact of China’s central bank to operate the foreign exchange rate of RMB against the market expectation on the short-term capital inflows during July 2005 to December 2013. The results show that, the exchange rate operations of RMB effects on the inflows of short-term capital, and such impacts can be divided into two regimes due to whether or not there is great uncertainty on international financial market. Compared to the normal time of international financial market, the uncertainty raised by the global financial crisis would make such operation of China’s central bank to constrain the inflows of short term capital effectively. However, as the average scale of the inflow of short-term capital per month is so large that the total effect of such operation is still limited. Therefore, it is essential to strengthen the capital account controls as well as other means to prevent the excessive inflows of short-term capital.Second, Using regional industrial production data with seasonal data of three main industries from 31 provinces during the period of 2004-2012, this paper examines the asymmetric effects exerted by the RMB appreciation to different industries in three regions of China based on the MS-VAR model. The results show that the RMB appreciation has significant regime-switching impacts on the 1th and the 2nd industries in all three regions, and with no different effect to the 3rd industry. The impacts can be divided into fast appreciation regime and slow appreciation regime. The impulse responses show that the shock caused by the fast appreciation of the RMB has greater influences. By comparing the effects of all three regions, it demonstrates that the fast appreciation of the RMB will impose greater negative effects to the lth industry of east, the 2nd industry of the middle and the lth and the 2nd industries of the west region. Therefore, the reform of the RMB exchange rate should fully consider its negative effects to different industries in different regions, especially to the leading industries of the middle and west regions.Third, The expansion of the RMB exchange rate volatility means that the influence of the change of RMB exchange rate on China’s economy will be more complex. By measuring the regional output gap with relative Theil weighted variance coefficient, and constructing MS-VAR models to analyze the impacts of the RMB appreciation on the output gap of both the intra-regional and inter-regional, this paper shows that the RMB appreciation has significant regime-switching impacts on both intra and inter-regional output gap, and such impacts can be divided into fast appreciation regime and slow appreciation regime. Moreover, both the effects of fast appreciation regime and slow appreciation regime can reduce the output gaps of intra-regional, as well as the eastern and middle regions, but may widen the output gap of the western region. What is more, the influence of fast appreciation regime is more significant in reducing the intra-regional output gap than that of slow appreciation, and the effects of both regimes vary in influencing the inter-regional output gaps.Finally, since 2005, the RMB exchange rate reform process and relevant theoretical researches have both strongly proved that simple RMB appreciation is useless in solving China’s foreign trade surplus. Combining the empirical conclusions above with the basic consensus on existing related researches, the policy suggestion of this paper are as follows: on the one hand, further market-oriented reforms of RMB exchange rate in the future still need to fully consider its potential heterogenetic impacts on industries in China’s different sectors, so as to improve China’s regional imbalanced industrial structure; on the other hand, in the post-crisis era, under the background of global rebalancing process, the economic rebalancing process in Europe, the United States and other developed countries leads to the downturn that China’s external economy faced to be normalized. Meanwhile, the differentiation trend of macroeconomic policies, especially monetary policies in developed countries, is increasingly obvious, therefore, other than fully consider the influence of RMB’s exchange rate further reform on domestic industries’ output fluctuations, it is also essential to pay enough attention to the short-term capital flow problem, which may exert negative impacts on China’s macro economy.