Exchange Control And Asset Prices

Economic globalization and financial liberalization are significant features of the world economy. The scale of the international capital flow expands rapidly, the velocity of capital is also accelerating. The international capital flows have important impacts on one country’s economic stability and development. Appropriate control becomes a reasonable policy choice. Foreign exchange control was generated in the First World War, and was used in major western industrial countries to regulate the capital flows. With the development of the world economy, the Western developed countries gradually abandoned the use of foreign exchange control but many developing countries are still using it. Large-scale flow of international capital and the relaxation of foreign exchange control frequently led to global economic crises. So nowdays, as an effective mean of control of international capital flows, foreign exchange control is still used in many countries, to stable the currency, to promote the balance of international payments, to deal with the economic crisis and protect the national economy. Foreign exchange control will exist for a long time in the world in the future.Overall, the worldwide foreign exchange control is gradually being relaxed. Foreign exchange deregulation has facilitated international capital flows. The flow of international capital can cause the volatility of asset prices in one country. Assets price fluctuation can cause tremendous impacts on a country’s financial and economic system, even a crisis. Therefore, how to reconcile the good use of economic openness and maintain the economic stability and development becomes a concern of governments. Study of foreign exchange control impact on asset prices and their mechanisms can help us to answer the above questions. By combining normative analysis with positive analysis approach, we will make a research about the foreign exchange control and asset price. In this paper, we first review the foundation of foreign exchange control theory and its emergence and evolution, and the contents of foreign exchange control and the evolution of china’s foreign exchange control. Then, we will make an IS-LM-BP theory model to study on foreign exchange control and asset price, and use the co-integration analysis and VAR model to analyze the empirical impact of China’s foreign exchange control on asset prices and its dynamic process and discuss the mechanism and channels of our country’s foreign exchange controls effects on the asset prices. Then, we discuss the relationship between the capital control and exchange rate control and assets price. Some useful conclusions are obtained to corroborate our foreign exchange controls and asset price theoretical and empirical conclusions. Given that the rate control is the world focus of our country’s foreign exchange control, we summarize the development of our exchange rate management system and study the dynamic interaction of international short-term capital flow, asset prices, exchange rate, monetary supply, domestic and foreign interest rate and expecting appreciation of RMB revealing the dynamic impact of the exchange rate and expected appreciation of RMB on assets prices. Finally, we summarize the experience of deregulation of foreign exchange control in Japan, Taiwan and other countries and regions, and illustrate the significance of foreign exchange control to our economy, and give some suggestion on the reform of foreign exchange control, especially the opening of the capital account and put forward some policy suggestion.In the twenty-first Century, China is undertaking a crucial period of economic development, transformation and upgrading of industry. China’s progressive deregulation reform of foreign exchange control has played a very good role in economic development, attracting international capital and isolating the world economic crisis.China should not be anxious for success in the foreign exchange control reform. We shall coordinate the progress, timing of the reform with other monetary policy, and coordinate the economic and financial system reform and industrial structure adjustment. We shall build up financial market price formation mechanism on rates, exchange rates, strengthen and improve the capital market and banking regulation mechanism. Furtermore, we shall review and orientate the macroeconomic policy’s coordination and compatibility continuously to adopt flexible policy in adjusting the speed of the openness of our economy. Overall, we shall realize the RMB capital account convertibility gradually and smoothly.