Selection Of Renminbi Currency Basket Based On Future Trading Relationship

China’s foreign trade patterns have undergone profound changes sincefinancial crisis. On one side, in the past years, European countries andAmerica are responsible for consumption and we in charge of productionand export. We called this model vertical division. However, our tradeswith developed countries have encountered a dilemma because of thesecountries’ economic weakness. On the other side, our trade volume withASEAN and resource supply countries continues to heat up. Horizontaldivision model gradually replaces vertical division.The government announced we choose a managed floating exchangerate regime based on market supply and demand with reference to a basketof currencies in2005. And the overriding principle of currency basket istrade volume, then foreign debt and FDI source. Along with the foreigntrade patterns change, if we cannot adjust currency basket in time, RMBnominal effective exchange rate may continue to rise and do harm to ourtrading and real economy. On the other hand,if we anew select currencybasket based on the trade partners relationship, we can makeforward-looking direction for our trading and real economy,but also avoidsystematic risk like trade sanctions and being forced appreciation causedby excessive pegged to developed countries currency.The dissertation can divide into five parts.The first part is paper background and literature review. Referred tothe background, we will review the evolution history of China’s exchangerate regime and reveal the phrase and influence of trade patterns change.We make detailed literature review about currency basket mechanism, foreign experience of basket (SDR and Singapore basket), method to selectcurrency and set weight to each currency as well as way to predict futurebilateral trade volume. Innovation of this dissertation not only derives fromthe relationship with future trade volume and currency basket, but we putforward ASEAN currency and resource countries currency. And thusgiving the advise that we increase weight of ASEAN currency andresource countries currency in RMB basket.Next two parts are the way to make the research. Second part is aboutthe construction of RMB basket. Because the currency basket regime willreflect in NEER(nominal effective exchange rate) index, we review thecalculation method of NEER, simulate basket currency constituted bymono trading weight and use this weight system in NEER simulation. Inthe paper,we point out that foreign debt and FDI account for less than20percent compared to trade volume, and if basket is designed under thepolicy target of trade stabilization, factors like demand elasticity needed inthe basket also depend on corresponding model, thus may derive someerrors. So we choose mono trading weight. Fortunately, using tradingweight as currency weight can finally simulate quite stable NEER index.The third part is prediction of future trade volume. We adopt greymodel GM(1,1). Result suggests that trade volume with resource countrieswill enjoy a compound growth rate of more than30percent, largelysurpass other economies. Meanwhile, trade with ASEAN countries aregrowing faster then total trade volume in all the four stage. We shouldincrease weight of ASEAN currency and resource countries currency inRMB basket, and decrease currency of high income countries. Finally wegive a definite RMB currency basket based on prediction data of2015.The fourth part is empirical test. We use diverse test method to certifysignificance of grey model. And also we attempt to combine withqualitative method. Data from World Bank strongly support the resultobtained from grey model. Final part is conclusion and advice. We reiterate significance to adjustRMB basket and give direction to our trading entities that they enhancetrade with ASEAN and resource countries.