The Impact Of RMB Exchange Rate Volatility On China's Exports

Exchange rate, as the ratio at which one currency can be converted into another currency, is an important instrument for achieving the internal and external balance of an economy. And it also is the most direct and most effective means of regulating the international economic competition relationship. After the breakdown of the Bretton Woods system in 1973, large exchange rate movements appeared in the floating exchange rate system, and the growth in world trade had a significant slowdown, which motivated the study of the impact of exchange rate volatility on world trade.In recent decades, the world economy develops towards globalization rapidly. The liberalization of capital flows, the great increase in the scale and variety of international financial transactions and trade, which would increase or reduce the impact of exchange rate volatility on world trade in different directions. Beginning from July 21, 2005, China implemented a regulated, managed floating exchange rate system based on market supply and demand and in reference to a package of currencies. To March, 2007, the exchange rate of Renminbi(RMB) is expected to appreciate by some 6.4 percent against the dollar for 7.74 yuan. With the deepening of RMB exchange rate reform, an increasing fluctuation of RMB exchange rate will exert great impact on China's economy and international trade. Meanwhile, the huge foreign trade surplus has also brought great pressure on the RMB exchange rate formation mechanism reform, which is the potential risk to China's economic development. Therefore, the analysis of the impact of RMB exchange rate fluctuations on China's exports has important practical significance.Based on the background of RMB exchange rate volatility increasing, we will analyze the impact of real RMB exchange rate volatility on China's exports starting with the direction of the impact. This paper is organized as follows. Chapter 1 is the introduction. Chapter 2 surveys the studies framework, conclusions and some special effects about the impact of exchange rate volatility on international trade flows in the theoretical and empirical literature. Chapter 3 introduces the general framework of empirically estimating the relationship between volatility and trade flows, the measurement techniques of exchange rate volatility and the categories of trade data. In chapter 4 we test separately the effects of RMB exchange rate volatility on every sector export flows during 1994 to 2005 and on the sector bilateral exports from China to America during 1999 to 2003. Then we analyze the different effects of the exchange rate volatility on different sectors exports and on bilateral exports between different countries. In chapter 5 we construct a GARCH model to estimate the RMB exchange rate volatility against the dollar, and then test the effect of RMB exchange rate volatility on the bilateral exports from China to America. Chapter 6 summarizes the major results of the paper. Then we put forward some policy suggestions for the reform of the RMB exchange rate mechanism and the improvement of China's international trade.