An Empirical Study On The Impact Of Sino-US Trade Frictions On RMB Exchange Rate

The Sino-US trade disputes have been existed for a long time.From 2003 to 2005,a series of trade frictions initiated unilaterally by US government cast a heavy shadow on Sino-US trade relations.It seems that the trade war is coming and both China and America have entered an unprecedented period of trade frictions.As a part of Sino-US economic and trade relations,Sino-US trade frictions have changed with the development of Sino-US political relations.In 2018,the Trump Administration,who ignored Chinese opposition,insisted on launching a trade war,and set off a new round of Sino-US trade disputes.During the same period,the real effective exchange rate index of RMB fluctuated enormously from 127.26 to 121.79,and the exchange rate of RMB against the US dollar declined from 6.3286(March 1,2018)to 6.9038(October 1,2018),with a decline of 9.09%in just seven months.Under the background of RMB internationalization,the fluctuation of RMB exchange rate has increased,and the exchange rate flexibility has increased.Firstly,this paper analyses the current situation and causes of trade frictions.The main causes of this new trade frictions are trade imbalance,US restraining China’s industrial upgrading and suppressing China for strategic competitors.Then we make a theoretical analysis of the exchange rate formation mechanism.The traditional determination theory of exchange rate includes purchasing power parity theory(PPP),interest rate parity theory,balance of payments theory and capital market theory.In the empirical analysis,the main domestic factors include:the share of government expenditure to GDP,labor productivity,the difference between investment and savings and other variables.Foreign factors include:purchasing power parity,terms of trade,openness,Sino-US interest margin,total import and export,foreign direct investment and other variables.In the empirical analysis,the VAR model is used to select the real effective exchange rate of RMB(REER)as the explanatory variable,the trade friction virtual variable(TW)is set,and the foreign exchange reserves(FER),total import and export(MI),relative PMI,foreign direct investment(FDI),money supply(M2)are selected as explanatory variables.A total of 105 months of monthly data from January 2010 to September 2018 were selected as samples.The empirical results show that REER itself,FER,MI and TW all have significant effects on REER.The trade friction variable TW has a negative correlation with the real effective exchange rate index.The occurrence of trade friction events will lead to the reduction of the real effective exchange rate and the devaluation of the local currency,which is consistent with the actual situation.With the grows of Chinese economy and the continuous improvement of its international status,the increase of Sino-US trade frictions is an inevitable trend and should be treated rationally.The stable and healthy development of Sino-US trade relations is in the long-term interests of both countries,and the interdependent interest relationship is the basis for the normal development of bilateral trade relations.The volatility of the exchange rate market and its flexibility to a certain extent are conducive to the development of the national economy.China should adhere to the market-oriented exchange rate and RMB internationalization,strengthen exchange rate flexibility,and keep the RMB exchange rate relatively stable.