Study On The Impact Of RMB Exchange Rate's Fluctuation To China's Foreign Trade

On 21st July, 2005, the People' s Bank of China announces that: from July 21,2005, China will reform the exchange rate regime by moving into a managed floating exchange rate regime base on market supply and demand with reference to a basket of currencies. RMB will no longer be pegged to the US dollar and the RMB exchange rate regime will be improved with greater flexibility, RMB was floating upward 2%. From than on, RMB exchange rate is always rising.According to the traditional trade effect theory, the continual rising of RMB exchange rate must influence China's import and export trade. Where would the effect go? In order to show the effect fully, this article is based on incomplete theory and uses the relevant yearly data to make demonstration study of the relation between RMB effective rate and China's trade balance, or trade structure.The results of demonstration prove: 1. China's import and export product demand elasticity conforms to the Marshall-Lerner condition. There is a long-term co-integration relation between RMB effective rate and China's trade balance: the continual rising of RMB rate will do harm to trade balance of China in the long term. 2. There is a long-term co-integration relation between RMB effective rate and China's trade structure: the slight rising of RMB rate will help China's export structure upgrading and ease the pressure of overwhelming trade favorable balance. In the end of this paper, based on the above study, relevant measure and advices have been given to postpone the pace of RMB rate rising and optimize the trade structure according to the impact of RMB rate's change on China's import and export trade.