Impacts On Macroeconomic By Balance Of Payment Surplus In China

China reformed its’ foreign exchange management system in the yearof1994. From then on, a institutional system has been developed gradually,which including exchange rate regime, exchange settlement system, quotamanagement positions for designated foreign exchange bank, exchangemarket intervention of central bank and money supply mechanism. Andexchange rate regime is the key of this institutional system. Since1994, apersistent surplus of balance of payment has aroused in China. Under theframework of this institutional system, surplus of balance of payment hasbeen converted into foreign reserves of central bank. Central bank of Chinahas to expand it money base in order to purchase foreign reserves, whichbrings inflation pressure into economy. Another problem caused bypersistent surplus of balance of payments is pressure to exchange rate ofRMB. How to deal with the pressure to inflation and exchange rate causedby surplus of balance of payment is the important problem faced by China’smonetary authorities.The existing researches can be divided into two groups. One group is from monetary policy perspective and another group is fromexchange rate perspecvive. Based on the analysis of existing of institutionalsystem, this paper argues that surplus of balance of payment can impactmacroeconomic variable through both monetary policy channel andexchange rate channel.Chapter1gives the research questions. Literatures review is made inchapter2and research questions are further refined and specified.Chapter3proposes a general equilibrium framework to explainmechanisms and paths through which imbalance of payment could impactmacroeconomic variable under managed floating exchange rate regime. As aspecial case, the mechanism and paths by which surplus of balance ofpayment affect macroeconomic variables are displayed in the generalframework. Balance of payment surplus brings about exchange marketpressure and monetary authorities can deal with the exchange marketpressure either by adjusting nominal exchange rate or by changing foreignreserves. In two adjusting ways, surplus of balance of payment can affectmacroeconomic variables in different paths. According to the variablespointing to price and output in the chain, exchange rate channel and moneychannel are put forward to generalize transmission mechanism throughwhich macroeconomic variables can be impacted by surplus of balance of payment. Exchange rate shock is the key in the exchange rate channel andmoney shock is the key in the money channel. Then a general equilibriummodel is build to explain how the macroeconomic variables respond toexchange rate shock and money shock.Chapter4discusses the two problems encountered in estimation ofexchange market pressure in China. In this paper, the concept of exchangemarket pressure is redefined to be used to estimate exchange marketpressure in multilateral exchange rate system. Another problem is the dataquality of foreign reserves caused by foreign exchange controls andadjustment method is given. And estimated China’s exchange marketpressure data from the first quarter of1994to the fourth quarter of2008islisted.Chapter5focuses on the exchange rate channel. The self-fulfillmentmechanism of expectation of exchange rate is the formation mechanism ofexchange rate shock. So exchange rate shock is defined as the disturbance ofnominal exchange rate caused by expectation of exchange rate. Followingtwo vector auto-regression model are constructed to examine the responsesof CPI and nominal GDP growth rate to exchange rate channel shock.Conclusions are following. With a1-quarter time lag, the exchange rateshock pushes the price index up in a initial period about four quarters and pushes it down after that. The maximum response value is0.039, whichoccurred in the second quarter. The impulse response function displayedthat nominal GDP growth rate responds negatively in most quarters with1-quarter time lag.Chapter6focuses on money channel. Surplus of balance of paymentare from the international business activities both of foreign-funded anddomestic-funded enterprises, which is converted into foreign reserves ofcentral bank and expands the size of assets of central bank.So central bankhad to expand either money base or central bank notes to adapt its assets.Sterilized intervention also affects money multiplier. Since both money baseand money multiplier are influenced by sterilized intervention, moneysupply may be deviated from its target growth rate. So money shock can bedefined as the deviation from growth rate of money supply from its targetgrowth rate. Conclusions from Empirical works of money channel arefollowing. In the initial two quarters, the money shock brings positiveeffects on nominal output and after that negative effect arises. With a1-quarter time lag, the money shock pushes the price index up in a initialperiod about five quarters and pushes it down again after that. Price indexresponds with a larger scale and stays a longer period than nominal output.And chapter7lists main conclusions and policy recommendations. This paper focuses on the topic of impacts on macroeconomic variablesby persistent balance of payment surplus. The main contributions of thispaper are:(1) Put forward to the transmission mechnanism of exchange ratechannel. Using the EMP as key variable, a general framework is established,under which exchange rate shock becomes the key section in thetransmission mechanism. In research work, the EMP is the first part in thetransmission paths which makes research works further;(2) Display theformation mechanism of money shock.In research work, money channel isproposed and money shock is the key section in the money channel.Bussiness activities of domestic-funded enterprises and that of foreign–funded cause the expansion of the scale of central bank of China, which isthe first formation mechanism of money shock. Money multiplier alsobecomes unstable with the sterilized intervention, which is the secondformation mechanism of money shock;(3) The concept of the foreignexchange market pressure is extended so it can be adapt to multilateralexchange rate regime.