Research On Fluctuations And Trends Of RMB Exchange Rate Under The Convergence Condition

Since reform and opening in 1978, China has experienced a rapid economic growth, and meanwhile China economy is increasingly integrated into international economic system. Exchange rate, as an important economic variable in an open economy, is related closely to import, export and capital flows and other economic variables. Exchange rate fluctuations can influence a country's economic policy and economic stability, and affect interests of individuals and firms on consume and investment behaviors.In recent years, the RMB issue is a hot topic in international area. Japan is the first country to stir up the question of RMB appreciation. Some officials in Japan accused the Chinese Yuan was undervalued and China exported deflation to the world in 2002. The United States and the European Union exerted pressure subsequently on China to urge a rapid appreciation of RMB. For example, U.S. Treasury Secretary Timothy Geithner expressed hope for Chinese currency revaluation several times in different conditions, and the U.S. House of Representatives held many hearings on RMB exchange rate. On October 9,2010, the U.S. House of Representatives passed a bill to punish China because of so called China undervalued currency which had impaired U.S. manufacturers and exporters. The bill would entitled the United States against China and other countries to an additional penalty from imported goods when calculating countervailing duties, and this means the U.S. government would levy additional tax rate which equals the estimated spread of corresponding undervalued currency. But even according to balance of international payments theory, China has no reason to revalue RMB, let alone China is in the special economic catching up period. In China, there are many different opinions on RMB issue in academic and political fields.As a price of foreign currency, exchange rate has a natural cross-border nature, and it is not only an economic variable but also a political concept. Different interest groups within countries and different countries'governments have different interests and actions. The RMB exchange rate evolution process is unique and has important significance. This paper uses intertemporal analysis, game theory and cointegration analysis methods to explore the law of the RMB in the Chinese Reform and Opening process, especially in recent years. From the view of economic structural changes, possible economic crisis and growing economic openness, this paper gives some explains. Compared with and analyzing the current conditions of emerging economies and developed economies, this paper finds common law of changes in exchange rate, and summarizes that under economic convergence conditions, RMB exchange rate changes should conform to the principle of economic efficiency.This paper uses a lot of modern economics methods and finds a series of new or improved conclusions. By using the Balassa Samuelson model framework this paper suggests that the relative labor share in domestic tradable and non-tradable sector has positive influence in value of the home currency, and the relative labor share in foreign tradable and non-tradable sector has negative influence in value of the home currency. Through data comparison, this paper finds that interest rate parity can explain the change of nominal RMB exchange rate fairly well. By Granger Causality test the paper suggests that exchange rate in one month NDF market affected the spot exchange rate of RMB significantly. The panel data models on several emerging economies and developed countries tells that the proportion of imports and exports and GDP growth rate have a significant impact on real effective exchange rate. By using an adjusted equilibrium exchange rate model on developing countries, this paper finds that RMB in 2007-2008 is over-estimated, and particularly in 2008 overestimated nearly 11%; while in 2009, RMB was undervalued by 4%. This paper also studies the historical process of RMB, and suggests that RMB exchange rate changes may go through four-stage process. By using game theory to study the relevant national policy on the RMB exchange rate, this paper suggests that the pressure U.S. put on RMB appreciation is only symbolic. Although in the long-term RMB will be in an appreciation channel, but for the time being, RMB should be kept stable, and should be revalued steadily and gradually. China government should pay more attention to short-term domestic economic structure modulation and growth pattern transformation. That is to say, domestic monetary policy and micro-finance policy have precedence over foreign exchange rate policy.