Research On Factors Affecting Currency Mismatches In China

As an economic phenomenon constantly observable in emerging markets, currency mismatches refer to a situation that an economic entity's assets / liabilities or revenues / expenditures are sensitive to the changes in the exchange rate when its goods and capital are denominated in different currencies because of its integration into the global economic system.Currency mismatches handicap the operation of floating exchange regimes severely. Earlier financial crises provide ample evidence of the role currency mismatches have played in them. It is no exaggeration that currency mismatches pose a serious threat to financial stability and sustainable economic security. Therefore, it is always the scholars'concern that what are the causes of currency mismatches and how to control them effectively.In fact, there exist serious currency mismatches in China. However, they did not enter the eye of people until the reform of the RMB exchange rate formation mechanism led to more flexible exchange rate. In such circumstances, risks brought about by currency mismatches rapidly become explicit and they impact the central bank as well as plenty of micro economic entities. Yet research and domestic monitoring on currency mismatches are at the initial stage.The subject investigated in this paper is currency mismatches of a nation. In order to do a better research, the method of combination of general theory and reality in China is adopted. Firstly, the paper sums up the definition, economic effects and measurement of currency mismatches. Secondly, it focuses on the factors affecting currency mismatches. Then, the factors affecting currency mismatches in China are analyzed based on realities and the aforementioned discussion. Through the index introduced by Goldstein and Turner, currency mismatches during the period from 1981 to 2005 are measured. Furthermore, the paper applies the model of multivariate linear regression to an empirical test and offers policy suggestions accordingly. It is believed that the research will be conducive to the advancement of the reform of the mechanism of the RMB exchange rate formation and economic safety.