Effects Of China's Real Estate Price Fluctuation On The Exchange Rates Of RMB And Current Account Changes

From 2015 to 2018,the Chinese real estate market had been heating up,and rising real estate prices had drawn attention from all walks of life.During the same period,the exchange rate of the RMB against the US dollar began to adjust upwards from 6.25 at the beginning of 2015,and it continued to hit new highs,rising to new highs of 6.94 on December 30,2016 and 6.98 October 31,2018,respectively.The sharp rise in housing prices and the decline in the value of the RMB during the same period may have profound and lasting effects on China's economic development.Wang and Shen(2007)pointed out that real estate prices and RMB exchange rate fluctuations are two dynamic adjustment processes necessary for the rapid development of the Chinese domestic economy.And only controlling one of these aspects will exacerbate internal imbalances in the economy.To balance the two macroeconomic variables,it is necessary to explore their internal connections.Some market participants attributed the real estate price and the depreciation of the RMB to the long-term easy monetary policy in the country,that is,the currency over-supply led to the rise in asset prices and the decline in the value of the currency.Since the marketization and commercialization of housing in 1998,the rising house prices have indeed been accompanied by over-supplied money.The supply increased from 10.45 trillion yuan to 177 trillion yuan in 2018.However,there are also voices that the short-term high real estate prices have led to enthusiasm for residents' investment(speculation)in real estate,the increase in household loans through leverage,and the increase in money supply.It also rose the concern of policy makers to adjust the monetary policy,and the new currency supply generated by mortgage.If the money supply exceeds expectations,it will also cause the RMB to depreciate.The proportion of new mortgages that began to climb in 2011 can confirm this thought.Although both of the two arguments above have data support,and they seem to be logical,but more rigorous scientific research and analysis should be carried out.In addition to monetary policy,current account balances,trade balances,and FDI may have an impact on house prices and exchange rates.At present,most of the relevant research abroad focuses on the correlation between monetary policy,real estate prices and current account balances.Ferrero(2014)pointed out that before the financial crisis,macroeconomic factors such as mortgage terms and consumer preferences could explain some part of the negative correlation between US real estate prices and its current account balances,and he also expressed the change of these factors did not explain the decline in global real interest rates.The expansionary monetary policy of the United States and the anchoring of the emerging markets' currencies to the US dollar are important for understanding the evolution of global real interest rates.There are few studies on real estate prices and the RMB exchange rate in China,and there is a lot of room for studying the relationship between real estate prices and current account balances.Moreover,from the actual economic data,there is some connection between China's real estate prices and its current account balances.The proportion of China's real estate industry's total output value on its total current account is constantly rising,from nearly $6 billion in 1996 to $27 billion in 2011,and the proportion has also risen to 20%.In addition,the real estate prices that started in 2004 drove the FDI in the real estate industry to rise from 2006.Then,with financial crisis in 2008,domestic real estate prices fell,and there was a similar trend in the current account balance changes.Based on the above facts,this paper attempts to construct a holistic research framework that incorporates real estate price changes,exchange rate fluctuations and current account changes,as well as central bank monetary policy.To construct such a holistic research framework can fill the domestic research gap on the relationship between China's real estate prices and current account balances,and provide a foundation for future research in this direction.What' more,it can be more comprehensive to study the relationship between the above macroeconomic variables,and can reduce the limitation and one-sidedness of studies of random two variables.In methods,this paper summarizes and generalizes the multivariate variables mediation effect test method according to the classic mediation effect test.By using Stata,it tests the mediation effect between China's macro variables and judges if there are direct correlations or indirect correlations between any two factors among China's interest rate policy,real estate price exchange rate and current account balance.After that,a two-agent,two-country,two-department)dynamic stochastic general equilibrium models(hereafter DSGE)with monetary policy was constructed.Matlab,Dynare and other research software was used to simulates the impulse response of major macroeconomic variables to technical shocks,preference shocks,financial shocks and interest rate shocks,and the reasons for the existence of such direct or indirect correlations was analyzed and explained.The results of the mediation effect test show that the direct impact of China's monetary policy on the RMB exchange rate is not significant.This is because foreign exchange reserves are used to stabilize the exchange rate,but China's real interest rate is directly related to house prices.This is due to interest rate changes affecting the cost of households to purchase a house.There is a direct correlation between housing prices and the RMB exchange rate.Housing price changes will affect residents' consumption and investment decisions.As housing prices rise,Chinese households will reduce loans to foreign countries.In the international lending market,RMB supply will decrease and the RMB will appreciate.China's current account balance is also directly related to housing prices.Real estate prices have mainly pushed up labor production costs in the production sector,resulting in a decline in the competitiveness of export products' prices in the international market and a deterioration in current account balances.The simulation results of the DSGE model show that real estate prices have a significant response to the impact of monetary policy.The positive impulse of monetary policy will bring real estate prices down by nearly 1%.Savings households will increase their interest rates in China and their domestic borrowing needs will decrease.Their budget constraint is more relaxed,and the foreign loans that can be provided increase,and the domestic currency depreciates by nearly 0.6%.At the same time,the loose budget constraint of the saving households increase demand for such household consumer goods by nearly 1.2%,offsetting the decline in the consumption of the loan households.Consumer demand increased by 0.68%,resulting in an increase in domestic import demand,combined with a decline in domestic consumer goods output,which ultimately led to a decline in China's current account balance of about 2.6%.The financial shock loosened the mortgage terms of the households with mortgages,and households' with mortgages budget was loosen,the demand for consumer goods increased by more than 0.05%,which led to a small increase in total demand,and the increase in house purchases was about 1.3%.And the house price increased;the domestic real interest rate increased,and the saving households reduce demand for consumer goods and housing purchases,increase funds for loan families,and decrease foreign loans,local currency appreciation.Output of consumer goods producing sector increases,in the process of CPI crosses the steady state level and continuous to decline,and current account balance improves.Under the impulse of the preference for house purchases,the purchase of houses will increase the utility of savings families and loan families more.Saving houselolds are willing to buy more houses and reduce the provision of funds for households with mortgate,due to the pressure of capital constraints,the domestic real interest rate rises,the reduction in the number of house purchased by households with mortgate is greater than the increase in the purchase of houses by the saving households,resulting in a drop in house prices of nearly 0.23%.The increase in domestic interest rates was less than the increase in foreign interest rates,and the depreciation of the RMB was nearly 0.75%.In order to maintain the utility,the households with mortgate increased their demand for consumer goods,boosted the overall domestic demand,and also the imports.The output of consumer goods increased by nearly 0.08%,but the price level rises by about 0.6%.Exports were under pressure and the current account balance fell by nearly 1.4%.Under the impulse of technology in the consumer goods production sector,labor costs have fallen,output has increased by 1%,prices have fallen by about 3.2%,nominal interest rates have fallen,savings households have increased their purchases of homes,and residential prices have risen.The “wealth effect” brought by rising housing prices not only increases the demand for consumer goods of saving households,but also further highlights the investment value of house.Saving households continue to increase the amount of residential purchases and reduce loans to foreign countries.The appreciation of local currency in the international market is about 0.3%.Domestic households with mortgate have less their wages and heavier loan interest payment pressures,consumer goods demands and residential purchase demand have declined,so they do not share the “wealth effect” caused by rising housing prices.The demand for consumer goods has been further reduced.The total demand for consumer goods and import demand decrease.In the comprehensive consideration of the increase in the production of consumer goods and the decline in the price level is conducive to domestic exports,the current account balance increases by 6%.Among the four shocks-monetary policy shocks,financial shocks,preference shocks and productivity shocks.The impact of monetary policy shocks on real estate prices,exchange rates and current account balances is relatively large;financial shocks have less impact on the above three macroeconomic variables.The impact of production efficiency on the real estate price and exchange rate is moderate,but tits impact on the current account balance is large;the influence of residential purchase preference and the technical impact of the consumer goods production sector is similar,that is,the impacts on real estate price and rate are moderate,and their impacts on the current account balance are large,but the magnitude is slight.Moreover,the impacts of each shock on other economic variables are different.Combining the above findings with China's current economic situation,following policy recommendations can be proposed: in short term,the more loose monetary policy will be the mainstay,and in the long run,corresponding policy methods and economic measures should be adopted to improve the production technology of the non-housing sector.And in the process of upgrading the production technology level of non-real estate industry,relevant policies should be implemented to guide enterprises to transfer part of their income from tax and fee reduction to the wage income of employees.