The Impact Of RMB Real Exchange Rate On The Trade Balance

Real exchange rate is the most important comprehensive price index used in international economy transaction and executes the function of transforming price. So it becomes the most important lever of regulating trade balance. Real exchange rate is regarded as a measurement of trade goods competence in international market. Its fluctuation can lead to a country's financial assets price change directly and guide the international capital flows, thereby influences a country's sustainable development of trade.July 2005, the RMB exchange rate formation mechanism was changed, it has rise and entered a period of relative floating. What kind of impact would such a mechanism of the exchange rate bring to China's import and export trade? How to deal with these changes? After china has entered WTO, although China's foreign trade has been in the multilateral trading system, but areas of concern in the bilateral trade situation, particularly with the United States, Japan are more important.Firstly,in accordance with the classical theory, this paper explain the general relationship between the real exchange rate and trade balance. Secondly, study the short-term and long-term relationship between the Real exchange rate with the United States and Japan bilateral trade balance of payments by empirical approach. Main contents include: if the RMB exchange rate and the China's bilateral trade balance has a stable long-term relationship; from the long-term perspective, if the changes of RMB real exchange rate can cause the change of China's bilateral trade balance; if the Marshall-Lener condition is established; in the short term, if the J-curve effect exist. What is the influence of the real exchange rate, real incomes and other economic variables on China's trade balance, and how much they play the role. According to the result of the quantitative and qualitative analyze, the RMB exchange rate and the China's bilateral trade balance have a stable long-term relationship, however, the relevance of the real exchange rate movements and the import and export volume is not very significant, in Sino-US trade relations, Marshall - Lerner conditions is established, but in the Sino-Japan trade relations, Marshall - Lerner conditions is not met. Accordingly, this paper analyzes the impact of the RMB real exchange rate movements on China's trade balance, and give some policy recommendations.