The Study On The Trade Balance Under The Capital Controls

At the backdrop of our country's trade surplus continues to rise and the record of foreign exchange reserves appears new high,the question of RMB exchange rate gradually becomes to the focus of attention for the parties.In order to curb the trade surplus and reduce trade friction,China on July 21,2005 announced the reform of RMB exchange rate formation mechanism. Since then,the exchange rate of RMB against the U.S. dollar has increased appreciation and the extent of appreciation has been as much as 21 percent until september 2008. At the same time,the expectation of the RMB exchange rate has been continuously strengthened. But it's surprise that the trade surplus is not narrowed, but becomes increasingly widen.In response to this situation, this paper argues that the main reason of China's trade surplus is not the RMB undervalued, but is the existence of substantial hot money inflow through trade channel which result in high surplus, and the appreciation expectation of RMB is the important reasons. RMB has been freely convertible in the current account in 1996 but not freely convertible in the capital account until now. The facts have proven that the effect of part control is poor. When the appreciation or depreciation expectation of RMB is exist, the hot money will flow through current item bypass capital controls because it is difficult to flow normally through capital account. Thereinto the trade item has many characters such as management loose, large-scale transactions and foreign-invested enterprises dominant and become one of the most important channels for the hot money to evade capital controls.Therefore, when the capital controls is not fully effective, the exchange rate expectation which affects the hot money flow will also affect the changes of the trade.First of all, this article will introduce economic variables such as exchange rate expectation into the traditional theoretical model based on the current status of China's capital controls and establish the trade balance model and take empirical studies of the trade balance of our country. The explanatory power of these empirical results is increased compared with those empirical results which use the traditional model, which indicate that the factors that affect the trade balance apart from basic factors such as the real exchange rate and domestic and foreign income, the exchange rate expectation is another important factor that can not be ignored. In addition, because the effect of appreciation expectation to the hot money shows eventually through the balance of trade which to some extent masked trade surplus lessen due to the real exchange rate appreciation and with the result that impact of the real exchange rate on the trade balance has been weakened. At the same time, the exchange rate expectation and trade balance influence each other. The exchange rate expectation spurs hot money influx through trade channels, so that the trade surplus continues to widen; and trade surplus expanded further exacerbated the exchange rate expectation and form a cumulative effect, and self-realization mechanism of expectation will push the exchange rate eventually rise. Anti-vice versa.Secondly,in order to enable nation and internation recognize impersonally our country's trade surplus, the paper will use the mirroring relationship between China's trade data and trading partners'trade data, taking into account the actual, excluding re-export trade and customs valuation factors, establish a measurement model to estimate the scale of hot money in the trade and our country's real trade balance.what's more, the paper will analysis the main background factors of hot money flow in different stages and reveal impacts of the hot money flow in the trade on China's economic.Finally, the paper puts forward many measures to solve the problems. In the long term, in order to fundamentally solve the problem of hot money in the trade, it is necessary to continuously create and improve the relevant conditions for the gradual liberalization of capital controls and the realization of free convertibility of the RMB which can reduce the pressure of trade item so that the balance of trade can reflect the real economic situation.However, realize the free convertibility of the RMB is a long-term process.In the current period of financial crisis spreading around the world and the exchange rate depreciation expectation, it is necessary to set up the monitoring system to guard against hot money withdrawal through trade channel which will take damage impacts on the country's economic. Of course, to achieve long-term balance of trade, it is necessary to transform gradually the mode of trade growth,optimize the industrial structure and enhance innovation capability.