| RMB has entered a scenario of “one-sided” appreciation against US dollar sincethe reform of RMB exchange rate which was launched in July2005. The appreciationof RMB, together with an expectation of a further appreciation, has attracted a hugecapital inflow to China and led to an over-booming capital and real-estate market inyear2007especially when China is following a loose monetary policy at that time.Meanwhile, in2007, the eruption of sub-prime crisis in US greatly increased thevolatility of global financial markets. The US government launched a massive bailoutto cope with the crisis and implemented two rounds of quantities easing, maintainingits benchmark interest rate under0.25%. While the interest of US is protected, USdollar floods the world with liquidity and a depreciation of US dollar is inevitablewhilst inflation is scattered around the world. Gradually, the financial crisis started toimpact the real economy and as a response, Chinese government enacted a huge fiscalstimulus plan to prevent the “hard landing” of economy. On top of that, the monetarypolicy was loosened. In consequence, an accommodation and quick response to theExternal Equilibrium again caused an over bounce of domestic economy, especially inthe real estate market.How to better connect RMB exchange rate policy with the internal and externalequilibrium of China economy, under such a complicated economic environment, is akey issue to be further discussed. To answer this question, the paper reviewed themechanism between the exchange rate reform (after China’s opening to the world)and the internal&external equilibrium, especially the effect of equilibrium. Viaanalysis, the author is of the opinion that the depreciation of RMB at the earlier stageof economic reform is NOT that effective in terms of the tune of equilibriumcompared with the later stage of reform. When RMB nominal exchange rate is peggedto US dollar, the external equilibrium is basically tuned by adjusting the domesticmonetary policy which could influence the actual exchange rate; after the reform of exchange rate, the internal/external equilibrium is twisted as a result of speculationand arbitrage. Thus, The RMB exchange rate policy in the future should incorporateboth the internal factors and the international influences.In view of the fact that the speculation and arbitrage is hot in the post reformyears, the paper also analyzes the economic bubble of Japan, which is quite similar tothe one China is currently is facing, under the frame work of internal/externalequilibrium and rationale of exchange rate fluctuation. Besides, to analyze the factorsinfluencing the appreciation of RMB and Japanese Yen based on theBalassa-Samuelson model; Researches show that, one of the reasons Yen and RMBappreciate against US dollar is that Japan and China possess a higher productivity ratecompared to US, which could enlighten the tune of RMB exchange rate in the future.In view of the similarity between China and Japan’s over-heating economy, it is ofreference value that China to cope with the partial overheats (the real estate market inparticular) with the research on the Japanese experience.In addition to the above analysis, the paper focused on RMB’s distortion anddeviation from its real effective equilibrium exchange rate. The main findings are asfollowing: the distortion of RMB’s nominal exchange rate from its equilibrium leveldoes not always keep at one side, i.e. appreciation or deprecation. In some particulartimes, they are on the same level; the distortion and deviation of RMB exchange rateis related to the conflict between capital market factors and goods market factors; thedegree of the deviation not only depends on the magnitude of inverse expectationfrom capital market factors and goods market factors, but also depends on theinteractions between pricing factors and quantum factors within capital market.Based on the above research, the paper moved forward with the analysis on theinteracting mechanism between China’s internal&external equilibrium and RMBexchange rate. The followings are the paper’s key findings. In the short term, thefactors that affecting RMB real effective exchange rate are trading surplus, monetarysupply volume and GDP growth rate. In the long run, the factor deciding futureequilibrium exchange rate comes from real economic factors. Therefore, the papersuggested that, it would be more effective to stabilize the long-run RMB equilibriumexchange rate expectation with the relaxing of short-term RMB floating band than just to narrow the gap between the nominal and equilibrium exchange rate. In addition, thegraduating appreciation of RMB’s nominal exchange rate should be connected withthe measures to put down of capital market overvaluation. RMB’s nominal exchangerate appreciation does not necessarily stick to its equilibrium level. Its adjustingmagnitude and cost should not only be related to the degree of China’s capital marketopenness and economic acceptance, but also be related to China’s whole economicdevelopment and competitiveness.Along with the growing openness of China’s economy and the rising shares inworld trade, policies on RMB exchange rate should also include the coordination withinternational monetary bodies. Based on the fact that China’s financial market is stillunder developing and the capital account does not open to the world, the coordinatingroute for RMB should take the order first on the regionalization and theninternationalization. In view of RMB’s regionalization, the government shouldcontinue to raise RMB’s settling function in bilateral and international trade.Furthermore, the reforming on China’s domestic financial market should speed up.And measures to stabilize RMB nominal exchange rate should be taken to preventover-speculation.To summarize the paper’s whole research conducted on the interactions betweenChina’s internal&external policy adjustment and RMB’s exchange rate, and alsodrawing lessons from Japan’s bubble economy during1980s, the paper made thefollowing three suggestions: first, deepen reforms on China’s economic structure andinternal demand, with an aim to balance internal economy and cut down pressures onexternal imbalance; secondly, improve monetary policies and financial marketreforms; last, continue with the process of RMB’s internationalization. |
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