The Research Of Valuation Effects And External Imbalances

Since1990s, along with the deepening of financial integration, international capital flowing between countries not only for the need of mutual trade, but also appeared to hold the financial assets in order to diversify risk and increase revenue. With the accumulated large current account deficit of United States, people are very worried about economic recession of the U.S., but its economy is running well. As opposed to the U.S., emerging market countries accumulated a lot of wealth by current account surpluses, but the economy is mediocre. This phenomenon is contradicting with the prediction of traditional theory which makes people begin to pay attention to the transfer of wealth from emerging market countries into the U.S. through the channel of valuation effects. Those wealth ease the possibility of debt crisis from the current account deficit of U.S.. This phenoenon brings new challenges to the measure of a country's Net Foreign Assets change just by the current account. People find that the accumulation of Net Foreign Assets (NFA) of a country is not only from the current account, but also from the valuation effects, which means the value changes of a country's NFA from the change of exchange rate and the price of financial asstts. Studying the valuation effects becomes very important for fully understanding the external imbalance of a country.Meanwhile, for our country, the reform of financial sector in Shanghai Free Trade Area is very striking which including the marketization of interest rate, floating exchange rates, openning up the financial sector and financial product innovation. These new attempts release a new signal of China's financial reform, which will become new attempts of our relaxation of capital controls and the freely convertibility of RMB. In the future, if these attempts succeed, changes in our NFA will increasingly influenced by the changes in the valuation effects. Macroeconomic policies in other countries or economic shocks will be transmitted through the valuation effects channels. So, ensure the smooth of valuation effects has important significance on the stability of the real economy.Based on this background and taking into account the fluctuations in valuation effects will impact a country's real economy, management of the risk of fluctuations in valuation effects has very significant meaning. This thesis intends to fill the gaps in existing research, firstly concerns about the fluctuations in valuation effects. From the perspective of the fluctuations in valuation effects, this thesis firstly considers the effect of exchange rate and the relative equity return on the valuation effects, compares the different volatility characteristics of valuation effects in emerging market countries as well as in developed markets countries. Secondly, this thesis uses the time series analysis to analyze the valuation effects of Thailand and U.K., then, further discusses the reasons for the differences.In this paper, from the research point of view, Chapter ? is a comparative analysis between the emerging market countries and the developed countries, Chapter IV and Chapter V based on the Chapter ? to further analyze the specific individual countries which reflecting the transform from overall to the portion. From the research results, the conclusion of Chapter ? stressed the structure of a country's NFA can mostly explain the fluctuations in valuation effects. Chapters IV discovers the differences of time series analysis of the valuation effects between Thailand and UK.. Chapter V is specific to a single country, further decompose the fluctuations in valuation effects into their own separate component of the NFA.In this paper, the main conclusions of the thesis are as the following:First, both emerging markets and developed markets should be more concerned about their own structure allocation of NFA to management the fluctuations in valuation effects. It's more efficient in developed markets than in emerging markets through exchange rates and increase the relative equity return to manage the fluctuations in valuation effects.Second, no matter in emerging markets or developed markets, one standard deviation of positive exchange rate shock will decrease the valuation effects. But, only the reducing of the valuation effects in emerging market has a reversal. This phenomenon is in line with Tille (2003) and many scholars who have pointed out the unique properties price of U.S. currency in the world monetary system.Third, both in emerging markets or developed markets, one standard deviationof positive relative equity return shock will increase the valuation effects temporarily. This result provides a management guidance of valuation effects by increasing the relative equity return and the change of valuation effects is positive.Fourth, both the exchange rate and relative equity return, only have impact on the valuation effects in the short run;it means that i changes in valuation effects are still affected by the real economy channels in the long run.These main conclusions can provide some policy suggestions about the risk management of the valuation effects as follows:First, China is still an emerging market country. When we manage the fluctuations in the valuation effects, more attentions still should be concerned about our own external asset allocation and the control of external liability for the risk holding of the financial products.We should not be too much focus on the exchange rate and increase the relative equity return.Second, China is still an emerging market country. A smooth management of the valuation effect should take a gradual exchange rate policy of the RMB and find a balance between export promotions by the RMB exchange rate policy. Because the changes in the RMB exchange rate will affect the final value of the NFA through both valuation effects and current accounts.Third, building a sound stock market can provide a positive influence to some extent for the stably management of the valuation effects. Combined with the speculation makers phenomenon in China, smooth management of the valuation effects has became one of the important reasons to speed up the establishment of a sound multi-level capital market in order to better service the real economy.Fourth, as the valuation effects reflecting the real economy and measuring the value of economic activity, the attempt of our country to try to increase the value of NFA by change the exchange rates and the relative equity return, can only have a temporary effect in the short run. In the long run, they are not effective. Long-term growth can only come from real growth in the real economy.