An Empirical Study On Exchange Rate Wave Effect And The Moderate Equilibrium Exchange Rate Of RMB

The expectation of future RMB exchange rate and its direction has a profound impact on China's trade expansion and economic growth. In order to reform Chinese foreign exchange policy to better aid its trade expansion, economy growth and full employment, three aspects need to be clarified before any policy advice can be given. Firstly, factors which affect RMB exchange rate has to be understood; secondly, impacts of exchange rate fluctuation on Chinese import, export, firm-profit-rate and employment level have to be identified and thirdly the range of an affordable rate of RMB for China must be analyzed and measured and the moderate equilibrium exchange rate has to be found. This paper will try to explore these aspects by using international finance theory, international trade theory and econometric method together with theoretical innovation. This paper wants to find a theoretical foundation in order to aid further reform on RMB exchange rate formation mechanism and thereafter to give recommendations to Chinese policy makers.Appreciation of RMB has a complex socio-economic background, which is a natural outcome of China's improved international trade position and stronger economy. "The argument for the appreciation of RMB"(revaluation of RMB) is however driven at least partly by political bias strengthened through irrational expectation from traders and speculators. If we oversee the topic with more depth, "a revaluation of RMB" is rather a result of Chinese urbanization process, the unfair income distribution and dependency of massive foreign investment. This appreciation is a complicated project of getting ride off the problem accumulated since a long time. It is also a self-adjustment of an imbalanced economy through market force.The real exchange rate and the nominal exchange rate appreciation have an obvious depressive affect on Chinese export. However a lower import cost has not caused a rise of import figure. Mainly because the slow response of the market body to exchange rate fluctuations, the rise of innovative ability of Chinese firms, a better substitution ability to import and the come down of Chinese demand for import goods. The RMB appreciation could indeed improve industrial structure of Chinese export sector. The drop of profit rate of labour-intensive industry has forced firms to invest more on R&D and on brand value to earn profit. It also encourages China's high value added industry to further improve their strength on technology and core competitive advantage. Furthermore it helps China to avoid pressure from trade partner, to improve structural efficiency of industries and to gain sustainable economic growth. Profit rate of China's export sector does significantly correlate with exchange rate. It is due to surplus labour supply and rising labour demand which is driven by rapid investment expansion.Since 1994 the moderate equilibrium exchange rate of RMB has come through three wave periods. It has been rising since 2003. Overall, a healthy exchange rate for Chinese economy should be within the range of 6-7. Comparing to nominal exchange rate, RMB is indeed undervalued to certain extend. Although a more expansive RMB will have negative effect on export, profit and employment, an interventionism approach would also bring great economic cost. Under the background of international financial crisis, China should keep RMB stable, avoid unreasonable appreciation, which will hurt economic growth and employment. According to international experience, even if a country has great imbalance on exchange rate, an adjustment may not be easy. It is a long-lasting process.