The Balassa-Samuelson Effect Of RMB Exchange Rate

The reform of RMB exchange rate regime was implemented in July, 2005. Since then, RMB showed a tendency of appreciation. At present, a strong expectation of RMB appreciation still exists. The expectation not only comes from external pressure such as political opinions from the U.S. and Japan, the adjustment of strong dollar policy and foreign trade friction, but also comes from the changes of real exchange rate from the view of domestic economic growth, which is the inner driving force for the changes of nominal exchange rate. Since practicing the Reform and Opening Policy, China has experienced long-term fast and steady economic growth. The integration of domestic economy and global economy increasingly deepens. The realized conditions coincide approximately with the hypothesis of Balassa-Samuelson Effect. Therefore, study on RMB's real exchange rate from the perspective of Balassa-Samuelson Effect comes to be a new research subject.The paper begins with the analysis on theoretical basis of Balassa-Samuelson Effect, i.e. Ricardo's viewpoints on two-sector division and productivity difference and the theory of Purchasing Power Parity, reveals the origin of Balassa-Samuelson Effect, and makes a further discussion on its inherent logic and theoretical implication. On the premise of ensuring Balassa-Samuelson Effect's theoretical core, the paper provides systematic analysis and research on its original models. Considering Balassa-Samuelson Effect and its original models just analyze the changes of real exchange rate from the supply side, the paper extends the research by introducing investment demand for non-tradable goods. Based on the theoretical research above, the paper conducts an empirical analysis on RMB Balassa-Samuelson Effect extended model, by using the data of China and the U.S. from 1985 to 2006 and considering industry which is among the secondary industry as the tradable section, others as non-tradable section accordingly. Finally, the paper points out that RMB will face with the pressure of appreciation in the long term, and put forward some relevant policy suggestions to release this pressure, such as deepening market-oriented reform on RMB exchange rate formation mechanism and greatly improving the productivity of non-tradable section with service industry as representative.