| On July 21,2005, Peoples Bank of China (PBOC) began to implement an adjustable and manageable floating exchange rate system based on market supply and demand and referring to a basket of currencies. From then on, RMB exchange rate began it’s path on one-way appreciation. With the reform on RMB exchange rate and appreciation of RMB, the real estate market in China also booms as well, and it never stops its rising pace and boosts a huge bubble, which is accepted by the whole world. On the same time, we witnessed the biggest bull market in past ten years on China A share market in 2006-2007. Not until the outbreak of sub-prime mortgage crisis in United States and later the global financial tsunami would the bubble burst. Even now, the average PE ratio of stocks in the Growth Enterprises Market (GEM) is still one of the highest in the world, it’s hard to say the bubble has vanished. All the evidences suggest that the bubbles in real estate and stock market have a strong connection with RMB appreciation, which has been testified by many scholars with relative Economics theory and empirical research. However, the mechanism of interaction remains unsolved, there is not yet a unified understanding in the academic circle. As is know to all, the burst of bubble will undoubtedly cause tremendous damage to the state and economy. Therefore, the research on the interaction mechanism of RMB exchange rate with bubbles on Chinese real estate and stock markets and their correlation has important theoretical value and practical significance for the present China, who is still in the progress of structure adjustment and development transformation of economy.This paper, based on reviewing and summarizing the relative domestic and foreign research articles on this subject, firstly applies VAR model to analyze the correlation of RMB real effective exchange rate (REER) with house price and stock index, then adopts the method of Co-integration test, Granger Causality test, the Impulse Response Function (IRF) analysis to study and make empirical test on the correlation of RMB REER, foreign currency capital shock with bubbles of real estate market and stock market. Through applying these econometrics methods we could find out that positive feedback interaction exists between RMB exchange rate and real estate and stock market. Meanwhile, we also found that the bubble in real estate market have great difference from the one on stock market in terms of the duration on the bubble’s formation, evolution or burst, or in terms of the bubble size. Different market, even different industry in stock market has its own characteristics and rules on bubble evolution. On the other hand, the trend on the formation, evolution and burst of bubble shows significant nonlinear characteristics, which has certain complexity. We cannot understand and analyze it by using the equilibrium analysis method under the framework of traditional economic theory. This paper, by introducing the idea of system engineering, applies the system’s positive feedback effect and the self-organized criticality (SOC) theory developed by Per Bak on the analysis of the bubble evolution, which can better reflect and explain the difference in the evolution of bubbles in real estate and stock market under the background of RMB appreciation. Finally, we apply JLS model on analyzing the bubbles in different markets to come to a conclusion that JLS model is predictable only for the endogenous bubble crashes, but not valid for those exogenous; and we also argue that RMB appreciation is an endogenous factor for those bubbles, so the critical points of them are predictable. This can be referential and useful for government on macroeconomic control and policy making in future. |
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