On RMB Exchange Rate&USDX And The Foreign Trade Of China With Financial Crisis

It is widely regarded as the world’s geo-economic changes in the pattern of major events that China’s economy has raised again. Since joining in WTO China has fasten the pace of participation in the international division of labor, and became the world manufacturing center. However, the accompanying increase of global payments imbalances has made intensified difficulty of discretionary choosing of exchange rate policy and monetary policy to Chinese government. In the context of the rebalancing of global accounts as well as safeguarding macroeconomic and stable financial development as main goal of exchange rate policy, it is important to further study(or to make intensive study) the impact of this change on international trade by exchange rate and its volatility. Moreover, China’s international trade is mainly dominated by the US dollar, no need to mention that the RMB nominal exchange rate is pegged to the dollar. It is also a valuable research topic that whether the US dollar exchange rate and its volatility will influence China’s foreign trade, and whether there is correlation between the volatility of US dollar exchange rate and that of the RMB. All these will derive a series of questions, such as whether the level of exchange rate and its volatility will have different impact on each trade partners, or on different industries, and how big China’s export and import can suffer by global economic crisis. In this paper, we try to answer these questions by employing related mathematical models to do quantitative analysis.This study include the following:first, we investigate the relation between the RMB real effective exchange rate, US dollar index as well as their volatilities and China’total amount of export and import. The RMB real effective exchange rate and US dollar index are fitted by using the model of generalized auto regressive conditional heteroskedasticity (GARCH) model, and then we obtain their volatilities. Second, we establish the export and import trade models taking into account the RMB real effective exchange rate and its volatility, the US dollar index and its volatility. By using vector autoregressive(VAR) model, cointergration test, error correction model, granger causality test and a series of empirical methods, we study the long-term and short-term impact on China’s total export and import by the RMB real effective exchange rate and its volatility, and also the US dollar index and its volatility. By building Copula models and doing a Granger causality test between the numerical quantity of US dollar index and RMB real effective exchange rate, we confirm the factor of US dollar exchange rate in the influence on China’s import and export. Based on the background of complexity of China’s foreign trade struxture, we provide a basis for decision making for estimating effectively the influence on the micro structure of trade by exchange rate policy in the past decade, and the next step of path selection of RMB exchange rate formation mechanism reformation. Third, by using vector auto-regressive (VAR) model, cointergration test, error correction model and a series of empirical methods, we study the long term and short term impact of the RMB real effective exchange rate, US dollar index and their volatility on China’s export and import with the first20trade partners and make preliminary summarize on the results. We calculate the overall trade balance index since China joined the WTO until June2010, the results show that during this period China’s foreign trade is balanced with a little surplus. Though comparing with several other industries models, we conclude some meaningful results, especially the result of GRANGER causality test between the total amout of export and import shows that China’s import can Granger cause China’s export and the contrary is false, which might be related with the role of China’s economic structure played in the industrial structure of the international division of labor. Finally, in the rest of the paper, we provide a brief description of the short-term impact and cumulative influence by2008financial crisis on China’s foreign trade and its trade with the first20trade partners using piecewise exponential model based on an intuitive perspective. The results reveal from another aspect one of the important external factors of China’s foreign trade.China’s exchange rate policy is the foundation and core elements to achieve our internal and external economic balance. Exchange rate and foreign trade goals are also the important indicator of financial stability during the process of integrating our economy into the world. The important findings of this study provide some basis for the decision layer to choose proper foreign trade policy and exchange rate policy under the restriction of financial balance.