Rmb Appreciation Of Asset Prices

With the rapid growth of Chinese economy and the fast increase of foreign exchange reserves over the years, the purchasing power of RMB continues to rise, which results in subsequent pressures of RMB's appreciation. On July 21, 2005, the Central Bank of China announced that RMB would appreciate by 2%. Since then the decade-long "pegged" system of exchange rate has ended and shifted to a floating one based on supplies and demands, with reference to a basket of currencies. At the end-Sept of 2008, appreciation of RMB has been implemented for three years. The exchange rate between RMB and dollar has risen from 8.28:1 to 6.83:1, and the cumulative appreciation rate has reached 17.5%, the average yearly increase of 6%.In the early period, asset price inflated substantially along with the appreciation of RMB. The A-share stock market index of China soared to its highest point of 6429 in October, 2007 from the lowest point of 1047 in June, 2005, with an increase of more than six times. While the price of real estates started to rise before the appreciation of RMB, and after the appreciation was generally recognized by the market, the prices of real estates of the big cities led by Beijing, Shanghai and Shenzhen have risen up by 2-3 times. Then, the Chinese government started the initiative to control asset prices from October, 2007. A stock index fell from its peak to 1892 point of September, 2008, with a decrease of 70%. After the second quarter of 2008, the real estate price also began to fall.Since the exchange rate mechanism reform, the RMB appreciation trend has not weakened, and asset prices experienced a sharp decline from the surge. The excess liquidity was still flowing everywhere, the mobility was not only resulted in a substantial rise in asset prices, and sine 2007 also led to inflation, which maintain in 2008. Stable monetary policy used by authorities for many years has shifted to the tight monetary policy. Chinese government is facing a series of difficulties. With the acceleration of nominal exchange rate appreciation of RMB, if we continue to expand the range, its potential impact on the economy will be incalculable, so the Chinese government is now in a dilemma.The inflation of asset prices along with the appreciation of the exchange rate is not exceptional, which can easily be found in other countries. The appreciation of the domestic currency and asset price bubbles are closely linked. Does the appreciation of the domestic currency really have an impact on asset prices? If so, what are the channels? After Japanese asset price bubbles burst, there was an economic depression which lasted for 10 years. Is there an association between economic recession and the burst of the bubble? Will China repeat the mistakes of the Japanese economy? How should we avoid the impact which the slumpin asset prices has on the real economy?Starting from the above-mentioned issues, the present thesis attempts to analyze the pressure of RMB appreciation and asset price inflation based on theoretical discussions and empirical research. This paper analyzes the impact of RMB appreciation on China's stock market and real estate market , further studies that tight monetary policy may result in the asset bubble burst which would impact on macroeconomic, and gives related solutions. To some extent, the sharp decline in asset prices is more terrible than the surge. If one government can not properly handle the sharp decline in asset prices, it will affect not only the macro-economic stability and sustained economic growth, but also the adjustment of industrial structure. China can not repeat the mistakes of Japan, because the cost for a developing country like China is too big and the consequences are very serious. China must take right actions.