Renminbi Exchange Rate Influences On China's Balance Of Payments

In recent years, China's balance of international payments has continuous surplus in the current account as well as the capital and financial account. Meanwhile, the foreign exchange reserve is getting larger and larger. So there are some problems with China's balance of payments. An empirical research is conducted to analyze the influence of Renminbi exchange rate fluctuation on China's balance of payments in this article. A few suggestions on China's policies are submitted according to the result of the research.Most domestic researches in this field are based on both the import models and the export ones. The researchers computed the demand elasticity to the price of the imported and the exported goods, which were compared with Marshall-Lener Condition. Then they drew conclusions on the influences of Renminbi exchange rate fluctuation on China's trade balance. But these works can't explain how Renminbi exchange rate influences inflow and outflow of the international capital. So the Renminbi exchange rate and the trade balance are put into the same model in this research. By doing this, the former's effect on the latter can be observed directly. The Marshall-Lener coefficient is inferred according to the result. After that, the empirical research into Renminbi exchange rate influence on the capital flow is seperately done. Thus we don't have to regard the trade balance as the whole balance of international payments.The theoretical analyses of Renminbi exchange rate influences on the balance of international payments are basically conducted on the condition of partial equilibrium and general equilibrium. To change the Renminbi exchange rate may be helpful to China's balance of payments, which is the conclusion of the theoretical research. Then the author selected Dai Zuxiang's function form of 1999 and Ma Xiaoye, Liu Mingxing's model of 2001 as the frame of the research. The related data is picked out of the economic intercourses between the U.S.A., Japan, Hongkong and China from 1994 to 2004. An regression has been done with these data. The empirical result is that international demands for China's goods has such a poor price elacsticity that the increase of Renminbi exchange rate can't reduce China's export volume, and on the contrary, to increase Renminbi exchange rate may enlarge the trade balance. Meantime, China's domestic demand elasticity to the income is also deficient, so the income increase brought by Renminbi appreciation can't enlarge the import or reduce the trade balance of payments. In brief, on one hand, China's import and export have little elasticity to Renminbi exchange rate, so it's almost impossible to adjust the trade balance of payments by changing Renminbi exchange rate. On the other hand, Renminbi depreciation may cause reduction of the trade balance. The above evidence shows China's Marshall-Lener coefficient is less than 1. Not only appreciation can't reduce the surplus of the trade balance, but also depreciation can't improve the trade balance. Presently China doesn't conform to the conditions of such theories as elasticity approach to the balance of payments. Empirical research on the capital and financial account comes to the conclusion that Renminbi exchange rate has not remarkable influence on FDI.We've learned from the above analysis that China can't eliminate the imbalance of international payments in today's internal financial and market environment simply by relying on Renminbi appreciation. The solutions to the problems of China's balance of payments shouldn't be confined to Renminbi exchange rate itself. The related policies and systems are more important and helpful. At last, the author submits some suggestions about these problems as follows, to reform the current foreign exchange reserve system and to enlarge imports of strategical goods, to change the current foreign exchange policies, and to supervise and control the flow of short-term capital. China is changing from planned economy to market economy, so the balance of international payments will be influenced by Renminbi exchange rate finally. The current exchange rate system is part of the reasons for the balance of payments keeping numb while Renminbi exchange rate changes. It's necessary to reform the exchange rate system. And the work should be done step by step in this process. Through the system reform, Renminbi exchange rate will be a real tool to adjust the balance of international payments, and China's international payments will keep balance in the long run.