Study On The Measurement And Influencing Factors Of Currency Mismatch In China

Currency mismatches in emerging market countries are common financial phenomena. In the early stage of development, these emerging market countries mainly have debt-based currency mismatches, as foreign debts are more than foreign currency assets. The large gap may lead to debt default or even currency crises. After crises, these countries have taken relevant measures to reduce the gaps of their currency mismatch. As the net foreign currency assets increase, the debt-based currency mismatches are transformed into claims-based. Therefore, it is very necessary to manage the foreign exchange reserves and control the foreign debt structure effectively.China is a developing economic power, and the existence of currency mismatch is inevitable. But our country's currency mismatch has its own unique characteristics. The most significant problem is that Chinese foreign currency assets and foreign currency liabilities are not growing symmetrically, and it makes a big currency gap with the accumulation of huge amount of net foreign assets. July 2005, the RMB exchange rate formation mechanism reformed as the exchange rate was no longer pegged to the U.S. dollar. It chooses a number of major currencies to form a currency basket, and the exchange rate changes following the multilateral exchange rate index. It is a managed floating exchange rate based on market supply and demand. Before the reform in the exchange rate, we have adopted a fixed exchange rate, which was controlled by the foreign exchange department. From then on, RMB has been under upward pressure with decreasing exchange proportion of U.S. dollar. In this case, Chinese foreign currency assets are facing the risk of loss, and this risk spreads from the macro level to the micro level gradually.This paper summarizes the research of others and studies Chinese currency mismatch problem. The content is mainly divided into five chapters. Chapter one is the Introduction. Firstly, it introduces the background of this article and significance of the research. Secondly, it makes accurate descriptions of the problem about the current research status. Thirdly, it introduces the research content and the basic framework. Chapter two is about the theories and models of currency mismatch. There are many studies on currency mismatch at home and abroad. In this chapter, it firstly introduces some theories and models of great importance. Secondly, some empirical models used in testing are briefly introduced in this paper. Chapter three is about the calculation and analysis of our country currency mismatch. In this chapter, it analyzes reasons that cause the currency mismatch to build the index system and calculate our country's currency mismatch using principal component analysis, owing to the method of economic cycle analysis. Furthermore, the future level of currency mismatch is predicted, and it calculates the currency mismatches of some countries with currency crises to verify whether the method is reasonable. Chapter four is about empirical currency mismatch testing. Firstly, this chapter studies reasons why China has such a large currency mismatch and measures how to reduce the gap. Then it analyzes economic factors influencing currency mismatch, such as currency mismatch gap, exchange rate, interest rate, inflation level and the degree of domestic financial development. Many testing methods are used, including co-integration relationship, linear and nonlinear Granger causality tests, and impulse response functions and variance decomposition. At last, it proposes several advices or recommendations.In this paper, we draw some meaningful conclusions. Firstly, we analyze reasons which cause the currency mismatch to build the indicator system and calculate our country's currency mismatch using principal component analysis, owing to the method of economic cycle analysis. We make the conclusion that there is a certain level of currency mismatch in our country. Secondly, we make the prediction of currency mismatch in the next three years. The result shows that the degree of currency mismatch may decrease in future, but it is still in a relatively high position, and the risk still can't be ignored. In addition, we find that the method used to calculate currency mismatches is reasonable and effective after some other crisis country's currency mismatch being verified. Thirdly, we select agency variables relating to empirical testing after the analysis of national macroeconomic factors impacting on currency mismatch. The conclusion is that exchange rate, interest rate and the degree of domestic financial development have positive correlation with currency mismatch gap. The current influences and short-term fluctuations during these variables are significant. Then, we make linear and nonlinear granger causality tests with VAR models and the conclusion is that nonlinear granger causality between variables is relatively more significant than linear granger causality. Finally, through impulse response functions and variance decomposition testing, we make a further study of factors influencing currency mismatch mechanism. Empirical results show that variables have a positive impact on currency mismatch changes, but they impact in different levels as exchange rate and interest rate are more important.