Rmb Exchange Rate, International Competitiveness And Economic Growth In China

Under the Chinese economic development mode in the past 30 years,the core international competiveness of our products mainly lies in low-cost human and natural resources contained in the product price.Correspondingly,our economic growth mode is mainly characterized as cheap-cost extensive growth which leads to substantial consumption of natural resources and becomes more and more unsustainable.Although China has kept high rate of economic growth in decades,the quality of the growth is causing people's concerns.Meanwhile,with the continuous increase of the percentage of net export in China's GDP and the increasing frequency of global capital flow,exchange rate is playing a significant role in China's export-oriented economic growth mode. Exchange rate is one of the core variables in an open economic environment and the RMB exchange rate has gradually become the focus of academic and practical discussions since China's reform and opening up.With the increasing extent of China's opening up to the global economy,the effects of exchange rate on the internal and external balance of Chinese economy has become more observable and the reaction of domestic economy to exchange rate has become more sensitive.In terms of the research objective,the paper defines the international competitiveness as "the ability of creating value-added and sustainable growth of national wealth by occupying the global market through international trade while comparing with other economies in the open-economy environment".In order to understand the impact of different economic growth modes on international competitiveness as well as the impact of the exchange rate on international competitiveness under a certain growth mode,this paper analyses the relationship between exchange rate movement and international competitiveness in terms of China's actual economic environment by employing a two-section model,Tradable Goods and Non-Tradable Goods Model or "TNT Model",which is based on the leverage effect of RMB exchange rate and the evaluation of the China's international competitiveness.This paper will finally justify the model's precondition and basic conclusion through empirical testing.The second chapter of this paper surveys most of the relevant literatures about this study.The first section of this chapter focuses on the studies about the leverage effects of exchange rate which is the basic element of the key assumptions and important tools in the core model of this paper.Section 2 introduces the literatures about the definition and evaluation approach of international competitiveness,including those studies of relationships between RMB exchange rate and China's international competitiveness as well as the studies of Balassa-Samuelson effect,which discusses the relationship between exchange rate and productivity in developing countries based on purchasing power parity, and its actual application in China.The 3rd section of this chapter summarizes the literatures discussing the relationship between economic growth and exchange rate equilibrium.It introduces the role that exchange rate played in the internal and external balance within the equilibrium real exchange rate framework.The last section of the chapter provides a summary of the above-mentioned literatures and gives a detailed introduction to the following research approach.Within the pre-mentioned framework,the third chapter of this paper studies the channels through which RMB exchange rate influences the macro-economy of China. Section 1 introduces a pivotal causation of leverage-effects:"the pass-through effect of exchange rate" of RMB.The different degree of price impact of exchange rate movement on tradable goods and non-tradable goods will change the internal real exchange rate and thus influence the equilibrium of the economy.This is also the basis of leverage effects by exchange rate in the TNT model.In section 2,this paper gives its attention to the interactions between the foreign trade and the real-target-oriented exchange rate regime in China.The third section of this chapter discusses the effects of internal real exchange rate on the supply structures of China's two sections and provides factual supports for model construction in the following parts of this paper.Based on the related literature survey on international competitiveness,the first part of chapter 4 provides a detailed analysis on the practical use of definitions of international competitiveness and its actual situation in China.It also defines international competitiveness discussed in this paper.Under the guidance of this definition,this paper classifies the evaluation indicators of international competitiveness into the quantitative indicators and the qualitative indicators in terms of the result and origin of international competitiveness.The following two parts of this chapter evaluates China's international competitiveness by applying popular indicators in the current stage according to this classification.The results imply that the international competitiveness of China has been improving rapidly when measured by the quantitative indicators,and relatively flatter when judged by the qualitative indicators.Some qualitative indicators even show a downward trend during certain periods. According to the pre-mentioned analytical conclusions,this paper builds up the TNT model to discuss the relationship between exchange rate and two-section equilibrium based on price rigidity in chapter 5.By combining quantitative indicators and qualitative indicators of international competitiveness,this paper analyses the general TNT equilibrium model with a more solid basis on a micro perspective and studies the relationship between internal real exchange rate and international competitiveness in a general equilibrium condition of the model.The following conclusions are drawn with the pre-defined level of overall production factors, techniques and consumer preference.First,the devaluation can improve the quantitative indicators of international competitiveness through raising the internal real exchange rate, which indicates that devaluation positively correlates with the improvement of quantitative indicators.Second,the objective of improving both quantitative indicators and qualitative indicators cannot be realized at the same time and only one of them can be realized by using the tool of exchange rate.In the following parts of chapter 5,this paper studies the changing characteristics of international competitiveness under different economic growth mode by releasing the consumptions of TNT model and discovers that under the condition of the unchanged technical level,the extensive growth mode relying on the discovery of resource leads to the decrease of the qualitative indicators of international competitiveness in the long run by depressing the original scale of the tradable goods section.On the other hand,under the extensive growth mode with the characteristic of factor input,the quantitative indicators of international competitiveness will deteriorate if the tradable goods section enjoys technical advantage but it will improve if the non-tradable goods section enjoys technical advantage.In addition,the appreciation of nominal exchange rate positively correlates with the improvement of qualitative indicators of international competitiveness under the intensive growth mode with the characteristic of technical development while the depreciation of nominal exchange rate positively correlates with the improvement of quantitative indicators of international competitiveness under the extensive growth mode with the characteristic of factor input.The section 4 of the chapter analyses the selection of policies to meet the quantity objective while improving the quality of international competitiveness under different exchange rate regimes and further discusses the adjustment approach to various non-equilibrium conditions within economic entities and the results which could be brought about.The study indicates that following conclusions. First,the exchange rate policy under a floating exchange rate regime is the most effective for meeting the quantitative objective of international competitiveness.Second,without considering technical development,the economic entity with factor-input extensive growth is highly dependent on the exchange rate devaluation policy in order to meet the pre-set quantitative objective of international competitiveness.Such policy selection will bring the economic entity into a vicious cycle of "Devaluation→Growth→Devaluation" and lead to the long-term under-valuation of domestic currency.Third,the internal real exchange rate of an economic entity with technique-driven intensive growth will be in a trend of appreciation if the scale of factor input is unchanged.If the government adjusts exchange rate policy in order to adapt quality improvement and keep meeting the quantitative objective of international competitiveness in this course,the internal real exchange rate will over appreciate and the result of over-valuation of nominal exchange rate could be brought about.The final chapter of this paper provides empirical supports for the assumption and basic conclusions of the TNT model discussed in chapter 5.The first half of this chapter tests the pass-through effects of RMB exchange rate with Vector Autoregression Model, which draws the conclusion that the changes in RMB exchange rate has obvious pass-through effects lasting for 7 to 8 quarters on different price level along the distribution chain,and these effects weaken as the tradability of goods decreases.Under a simple generalized equilibrium framework,the second half of this chapter tests the conclusions of the model in chapter 5 by employing cointegration test with variables calculated in foregoing chapters and further discusses the self-adjusting capability of China's real exchange rate through error-correction model.The empirical result is in line with the conclusions of the model in chapter 5.In terms of cointegration relations,the real exchange rate depreciation positively correlates with quantitative indicators of international but it deviates from the requirement of relative productivity improvement; on the other hand,real exchange rate appreciation positively correlates with qualitative indicators but it doesn't help improve the quantitative indicators in the short run.