An Empirical Study Of The Effects Of RMB Exchange Rate On International Trade Of China

China began to open its markets in the late 1970s and since then Chineseeconomy showed rapid and continual growth in the following 30 years. In 2010,China became the second largest economy in the world measured by GDP followingthe United States. However, China came across serious problems such as continuoustrade surplus in its BOP resulted in high foreign exchange reserves and huge tradeimbalances. Many western countries led by the US attributed China’s trade surplus toRMB undervaluation and put pressure on China to revalue its currency.Therefore, we can say that it’s meaningful to analyze the relationship betweenChina’s trade surplus and RMB exchange rate via the empirical tests. That will helpus understand the relationship between appreciation of the RMB exchange rate andChina’s trade surplus.In order to explain the relationship between RMB exchange rate movements andChina’s trade surplus, this paper firstly reviews basic theories of the impact ofexchange rate on the balance of payments. And then reviews some previous studiesfor both of domestic and foreign countries. In Chapter 4, we will do quantitativeanalyses on data and run the empirical test models. For quantitative analyses of data,we will utilize some basic techniques such as Unit root test, Jonhansen co-integrationtest. We will analyze the impact of changes in nominalexchange rate on China’s export and import, utilizing the simple and multipleregression models to discuss the impact of the RMB exchange rate on internationaltrade of China.The findings of empirical tests according to the results of the empirical test areas follows:The nominal exchange rate affect China’s export significantly ie., theexport increases when the exchange rate decreases, which is contrary to thetraditional theory. The import increases when the exchange rate decreases, that isconforming with the traditional theory. The trade surplus is also increases when theexchange rate decreases. Furthermore, the current imbalance in BOT of China hasnot been a pure currency valuation problem, rather than a structural one. So tospeak, after the appreciation of RMB, the export volume of China’s manufacturedgoods continue to rise because the intermediate product and raw materials andcomponents will be imported more cheaply and then processed and exported, and inthis process the appreciation will cause a lower import price, then the cost of exportswill be reduced. In other words, the import competitiveness will cause exportcompetitiveness, which will raise the value of RMB and China export altogether andits surplus in BOT will increase. That is the reason why it is difficult to balanceChina’s trade surplus merely by the appreciation of the RMB.Based on the result of our analyses, we conclude that the way to achieveChina’s external equilibrium is to be found in adjusting the internal economicimbalances of China. China’s trade imbalances can be moderated by the followingmeasures:the co-development of industries for domestic and international demands,more globalized fiscal and monetary policy and the improvement of the exchangerate regime for free floating system.