The Choice Of China's Macro-economic Policies In The Expectation Of RMB Appreciation

21^st of July 2005, China announced to use a floating FX rate system with management that based on supply and need in the market, and be adjusted referring to the "Basket of Currencies". This important reform is for releasing the pressure of RMB appreciation from both domestic and overseas on one hand, and also for the urgent requirement of China's FX rate system reform on the other hand. Since the reform, RMB starts to appreciate, but the unbalance of international payment didn't get better because of that. The double-surplus of the current account and capital account and the never-end appreciation expectation cause excess liquidity in the market. The excess liquidity flows into real-estate market and stock market, making bubbles of asset price start to grow. The unbalance of economy gets more and more serious.In the 1980s', Japan has had similar experience with China. Because of the serious unbalance of foreign trade between America and Japan, America government started to push Yen to appreciate. Since "Square Agreement" in 1985, Yen start to appreciate: from 239:1 in 1985 to 80.15:1 in 1995. The government of Japan used low interest rate policy, tried to avoid stagnancy of economy, but lead Japan into the "Liquidity Trap"; The appreciation did not improve the surplus of foreign trade, expectation of future appreciation was still strong, that made the interest rate even lower; The excess liquidity had no way to invest, so they all flow into the stock market and real-estate market, making the bubbles grew bigger; Lots of capital also flew out of Japan, decreasing the investment need of domestic market. With ineffective currency policy and troubled fiscal policy, it's hard for the government of Japan to stimulate the economy. Japan had experienced the economic depression for almost 10 years. How to avoid the same thing happens to China? We have a lot to learn from Japan's experience.This paper analyses Japan's lesson from three aspects: The origin of currency appreciation pressure, financial market openness, and fiscal and currency policy.In the 3rd chapter, the paper analyses the origin of currency appreciation pressure both for China and for Japan. For Japan, the pressure comes from surplus of foreign trade, FX risk of financial institutes and appreciation expectation. For China, although most part of the pressure is from the surplus of foreign trade, there are some differences in the reason of surplus and interest structure. In order to release the pressure, the paper suggests: 1, Improve the unbalance of foreign trade. In the shot and mid-term time, China should decrease the "Drawback Rate", increase the import of strategy stuff and keep politics negotiation. But if we want to solve it from the root, the unbalance of deposit and investment should be improved. 2, Eliminate the appreciation expectation. 3, Control the flow-in of "Hot Money".In the 4th chapter, the paper analyses the experience of Japan's financial liberalization, and points out that financial liberalization has some positive influence and also brings risks. It has caused the flowing out of Japan's capital, and caused bubbles of assets. As the openness of China's financial market, China should look out the risk of capital flow and the import of world's excess liquidity, and also supervise the financial market to avoid the banks' excess liquidity to push up the price of assets.In the 5th chapter, the paper analyses the experience of Japan's fiscal and currency policies from 1985-2000. Japan's improper currency policies have lead Japan into the "Liquidity Trap" and the bubble economy. After the bubble overturned, Japan's economy was hard to resurge because the invalidation of currency policy and the difficulty of fiscal policy. Learning from Japan's experience, China should insist the flexibility, independence and effectiveness of currency policy, avoid "Liquidity Trap", and use expanding fiscal policy to offset the negative impact of RMB appreciation.