Factors Analysis And Prediction Of RMB Exchange Rate

On July21,2005, China launched the reform of RMB exchange rate formationmechanism, whose main purpose is to restore the price elasticity of the foreignexchange market, and to rectify distortions in foreign exchange supply anddemand. On May18,2007, the daily trading rate of USD/CNY in the interbankforeign exchange market, has been enlarged to the scope of±5/1000with thecentral parity announced by the central bank. More over, the participants of foreignexchange market have been gradually diversified. These both stimulate thematurity of RMB exchange rate formation mechanism.Then in January2007, the U.S. sub-prime crisis began to appear,6monthslater, the crisis began to spread to global stock markets rapidly. And then in theyear2008, the crisis began full-blown, causing financial and economic turmoilglobally. Obviously, the international financial situation will inevitably produce asignificant impact on USD/CNY exchange rate with the change of internationaleconomic and financial environment,we need to re-examine USD/CNY exchangerate: on one hand, a variety of macroeconomic factors may change the way ofimpacting the RMB exchange rate, therefore it is necessary to find out how theformer factors influence the RMB exchange rate now; On the other hand, thefinancial crisis has a relatively small direct impact on China this time, resulting inthe preference of holding the yuan, which may bring more risks and uncertainty toRMB exchange rate.In all,to predict the RMB exchange rate rationally andeffectively has really important practical significance.What’s more, many research papers on exchange rate emphasize too muchon single-factor analysis or technical analysis, but lack of multi-factor study aimingat the USD/CNY exchange rate，especially for the study by Chinese scholars.Therefore, this thesis would integrate classic exchange rate determination theories,and construct a multi-factor model of the RMB exchange rate.First of all, this paper analyzed comprehensively the macro-economic factorsaffecting the USD/CNY exchange rate from July2005, and pointed out therelationship of RMB exchange rate and the macro-economic factors. In this part, reasonable variables were selected by the economic significance.Then, this paper established the RMB exchange rate VAR model on the theoryof cointegration, vector autoregressive models, and other econometric tools. Themodel satisfied relevant statistical test indicators, and can serve as a reasonableand effective estimates. After that, this paper adopted variance decomposition togive out the relative importance to RMB exchange rate of the macro-economicfactors involved in the VAR model. The preliminary conclusion is that: thegovernment can use foreign exchange reserves, open market operations,regulation of interest rates to manage the RMB exchange rate. In addition, theRMB’s nominal exchange rate subject to excessive government intervention,making the RMB exchange rate lack of fluctuations in flexibility.Finally, the paper forecast the RMB’s nominal exchange rate based on VARmodels. The results of the unconditional forecast showed the trend of RMBexchange rate in the future. The main purpose of this paper is to point out that VARmodel is a meaningful way to forecast the RMB exchange rate, and it reached theinitial goal basically.