A Study Of RMB Double Rate Adjustment And China's Trade Banlance Control: Theoretical And Empirical Analysis

Trade Balance of Payments is essential for a country's foreign trade development. Neither excessive trade surplus nor trade deficits are conducive to sustained and stable growth of foreign trade. Every year since 1994, for the accumulated trade surplus China is facing more and more trade friction, so that the pressure of RMB's appreciation is increasing. Factors that affect the trade balance are very complex, in which the exchange rate affect a country's imports and exports not only directly through price channels, but also indirectly through foreign direct investment (FDI) channels, and thereby affecting the balance of trade. Interest rates can affect the trade balance not only through exchange rate channel but also through channel of financing cost, and thus affecting the balance of trade. The complexity of exchange rates and interest rates' impact on the trade balance makes the coordination of dual-rate particularly important to maintain the steady growth of trade balance.Since 2007, the RMB exchange rate and interest rates rise at the same time, resulting in China's foreign trade exports and trade balance fell significantly, monetary policy control measures made by the People's Bank of China thus induced some scholars question. Thus, to know what impact the "double rate" (the exchange rate and interest rates) coordination on a country's trade balance, and thus how to make use of the policy portfolio to promote the stability of China's foreign trade development and the appropriate balance of trade balance is of both theoretical value, and of more important practical significance under the current global economic recession.The paper is written from theoretical and empirical levels around the RMB "double rate" adjustment and China's trade balance control, the full text is composed of 8 Chapters. Chapter 1 is Introduction, provides an overview of the significance of research ideas and the structure of paper. Chapter 2 is summary of related research on "affection of Exchange rate fluctuations and changes in interest rates on the trade balance, trade balance control". Chapter 3 reviews the situation of adjusting RMB "double rate" and the balance of trade situation after the reform and opening up. Chapter 4, firstly, from the microscopic perspective divides the cost of production exported by enterprise into the wage labor costs, production costs and input prices of capital interest cost, builds corporate profit maximization model to solve export prices and domestic market prices of the elements of cost function, analyses comprehensively of the main factors impacting a country's imports and exports from a microscopic perspective through adding the total sum of enterprises to deduce the influencing factors of an industry and a country's exports; secondly analyses the main factors of exports of one country in different sectors and different markets in competing structure through the theoretical model the equation of import and export to infer the different effects on a country's balance of trade resulted from changes in exchange rates and interest rates. Chapter 5 starts from the perspective on the balance between import and export demanding and supplying of a country , and then derives from the empirical equation of the factors impacting a country's trade balance, empirically analyses how the RMB exchange rate and interest rate changes affect China's total trade balance, country trade balance and types of merchandise trade balance by covariant model. Chapter 6 introduces the variable of foreign direct investment, sets up theoretical model to state the conduction mechanism between exchange rate, interest rates, trade balance and foreign direct investment, empirically analyses the impact of the RMB exchange rate and interest rate movements on our country under the conduction path of foreign direct investment compared with which without foreign direct investment. Chapter 7 expands the traditional DD-AA and TB model based on the Conclusion from chapter 5 and 6 to find the monetary and fiscal policy mix to maintain balanced growth of China's national economy both inside and outside.In this paper, the main conclusions are: (1) the trade balance is inversely proportional to the relative income levels, the RMB exchange rate, the RMB relative interest rates, relative wages of labor, the relative price of production inputs, is proportional to foreign direct investment. The order of the size of the variables' impact on the trade balance is as follows: relative income level, the exchange rate of RMB, foreign direct investment, the relative interest rates of RMB, relative wages of labor and the relative price of production inputs. (2)RMB "double rate" changes on the impact of trade surplus countries are greater than that of deficit countries. The stronger the competition of the category of merchandise, the greater the impact put on the trade balance of them. (3) Foreign direct investment can offset the trade balance declining when the RMB "double rate" appreciates, while the situation is opposite when RMB "double rate" devalue. (4) In the current context of world economic recession, it must lower RMB "double rate", at the same time, pay attention to monetary policy and fiscal policy mix to promote the development of China's trade balance and the balanced development of the domestic economy. It is also important to speed up the velocity of money circulation, convenience corporate loans which is the most important monetary policy .Fiscal policy and foreign trade and economic policy should focus on increasing government spending and tax relief, promote the growth of processing trade based foreign direct investment, encourage exporting. The end-result of all our policies is putting importance on China's pillar industries in the top ten, especially electrical and mechanical trades, light industry and textile and garment exports which is related to employment.The innovation of this paper is as follows:(1) the "double rate" changes' impact on trade balance. From the microscopic perspective dividing the cost of production exported by enterprise into the wage labor costs, production costs and input prices of capital interest cost, building corporate profit maximization model to find out the factor impacting a county's export price, gaining the main factors impacting a country's imports and exports through adding the total sum of enterprises. And deducing the influencing factors of an industry and a country's exports from a microscopic perspective, which is more convincing compared with the past through the analysis of macro-economic model. It is also more convincing to empirically analysis how the RMB exchange rate and interest rate changes affect the trade balance of China, using the condition of supply and demand balance for export and import, putting the variable which has impact on export prices into a country trade balance equation. (2)processing trade-FDI is help for steady growth of trade balance in the "double rate" changes circumstances. There is much more theoretical innovations and practical guidance to introduce the interest rate factor prices as a price of production factors into trade balance equation to research on the impact from "double rate" changes on trade balance compared with only researching on the impact from exchange rate on trade balance in the past. (3) In the empirical analysis, using covariant model to examine the structure of variable mutation phenomenon. This model can tested endogenous variable's structure point mutation. This method of treatment is more scientific than considering a case of some unexpected as exogenous variable's point mutation in the past, avoiding negative impact of research findings resulting from the subjective bias.(4)Putting foreign direct investment as the main variables of a country's import demand and export supply into empirical equation of the factors affecting one country trade balance. By studying the different effects between short-term and long-term from "double rate", we found out that processing trade-foreign direct investment can ease the fluctuations in trade balance when the "double rate" changes.(when "double rate" appreciates, foreign direct investment can ease the decline in trade balance;when "double rate"devalues, foreign direct investment can buffer the decrease of the trade balance on the short-term, long-term are of opposite).(5)developing and amending the traditional DD model (market equilibrium) and the TB model (trade balance equilibrium model) based on the results that interest rates have practical implications on the trade balance. Using the method of monetary analysis to divided a country's money supply into domestic basic supply and foreign exchange reserves supply resulting from foreign direct investment and trade balance. Expanding the traditional AA model (the money market equilibrium).And then taking the three expansion models to into a framework to analysis with the country's inside and outside macroeconomic balance, which is more reasonable than the correlation analyses that do not consider the impact of interest rates on trade balance and the impact of foreign reserves on money market balance supply.