The Study On The Validity Of China's Exchange Rate Policy

As one of major macroscopic policy tool, exchange rate policy is important for government in pursuing internal and external equilibrium. From the balance of payment angle, I study the validity of exchange rate policy on adjusting trade balance.Since 1990s', under the ground of China's system reform and global industry shift, Chinese foreign trade made great development. The trade commodity structure promotes gradually, and the radio of processes trade in total trade became more. As the specific trade structure would influence the validity of exchange rate policy, studying the validity of exchange rate policy in such specific development phase has theory significance. Moreover, the effect of exchange rate policy has vital practical significance for trade policy and exchange rate policy marking, and for opening pattern selection.There are two innovations in my dissertation:First, I examine the long-run bilateral relationship between the exchange rate and real trade balance on a quarterly basis over 1995 to 2006 using the partial reduced form model. Then, I study the degree of exchange rate pass-through to import price and then to export price, the purpose of which is to examine the conduction way of exchange rate policy. Therefore, my analysis is more systematical and comprehensive than the previous study.Second, I study the effectiveness of exchange policy on bilateral trade basis and on the area structure basis respectively, but not on aggregate analysis. As there are some useful information would be ignored in aggregate analysis, expecially when some countries have trade surplus with China and some have trade deficit with China. Moreover, structure analysis has definite policy significance compared to aggregate analysis, and would be useful for government policy making.My findings suggest that the real exchange rate do have an impact on some bilateral trade balance in the long run if exchange rate appreciates more quickly. However, big exchange appreciate will do harm to macroscopic economy, such as investment, employment and so on. According to forecast, when RMB appreciates over 6%, investment and export will decrease, and then the employment will fall. The government must keep internal stable when adjusting external unbalance. Therefore, it is necessary to keep exchange rate appreciate gradually. Further studies suggest that exchange rate misalignment is not the only reason causing great trade surplus. Empirical analysis indicates that it is the process trade pattern that made exchange rate policy invalid in the short run. And the short of demand is another reason making great trade surplus.The findings indicate that it needful to adjust trade unbalance by structure reform, including industrial structure adjustment and income distribution adjustment.