The Analysis Of The Relationship Between RMB Exchange Rate And China-US Bilateral Trade Balance

In recent years America always imposes great pressure on China, because America thinks that China’s trade surplus with America is the result of China’s deliberate manipulation of RMB exchange rate. They think the trade imbalances can be solved through appreciation of RMB exchange rate. This paper focuses on the relationship between RMB exchange rate and China’s foreign trade with America to find if the appreciation of RMB exchange rate inevitably leads to the balance of the two countries’trade and to propose some suggestions and recommendations.The paper gives some well-known theories with regard to the relationship between foreign exchange rate and foreign trade and also introduces the previous research conducted by domestic and foreign scholars in this field.The next chapter gives a backward glance at Japanese Yen’s inflation which began years ago when Japan was also confronted with large trade surplus as well as American ever-increasing pressure on Yen’s inflation similar as what they have been doing to China in recent years. While the truth tells that Yen’s deflation has not improved the imbalance of Japan-US bilateral trade but gave a greatly negative impact on Japanese economy. Even now Japan has not recovered from its recession.Since the foundation of the Republican of China, RMB exchange rate has experienced four big reforms and changes. During every period, we can hardly draw the conclusion that deflation of RMB can reduce the trade surplus by China’s statistics or by comparing the curve of RMB exchange rate and China’s trade with America. Especially during ten years between1994-2005, the RMB exchange rate was stable, but trade surplus kept going up while after2005the RMB exchange rate began to appreciate, China’s trade surplus with America was rising even more dramatically.In the fifth chapter we do the empirical research by adopting the data of real effective exchange rate of RMB, real GDP of America and China, and China-US bilateral trade balance from M11995to M122011. The effect of real GDP of America on China-US bilateral trade balance is much more than that of RMB exchange rate. In the meantime there is no causal relationship between China-US bilateral trade balance and RMB exchange rate.Besides RMB exchange rate, there are some other factors having an effect on imbalance of China-US bilateral trade, including American low saving rate, difference in data collecting, restrictions imposed by America on export to China and world industry structure transfer.The conclusion finally can be drawn that RMB exchange rate is not the main cause of China-US trade imbalance and the appreciation of RMB can’t solve all the problems right now. America should shift from forcing China to change its RMB exchange rate policy to improving his own problems and policies. In the meantime China should stick to its foreign exchange rate reform, change its export product structure and take measures to enlarge its domestic consumption.