Assessing The Relationship Between The Rmb Exchange Rate And The Sino-us Trade Balance

In recent years, due to China's trade surplus expanded, the international communities have questioned whether the RMB exchange rate is undervalued. The issue whether RMB should be appreciated has rose from purely economic issues to political issues.Due to the largest external imbalances in its history has taken place in the United States, they believe that China's currency manipulation of government directly led to serious unemployment and trade deficit the United States. Over the years, the US-led Western countries and China's trade disputes and frictions intensified.July 21,2005, the PBC introduced a new exchange rate policy, also be a response to the international public opinion. Since then, the RMB hit a new high nominal exchange rate constant; however, China's trade surplus has not been improved at the same time. The nominal exchange rate has been fall from 8.2765 in July 2005 to 6.82 in the July 2009. But in fact the Chinese trade surplus is growing particularly fast in 2006 and 2007.Exchange rate is simply the price of one currency in terms of another. As an essential constituent part of price system, exchange rate will exert important influences on a country's foreign trade because its fluctuation can change the comparative price of import and export goods. It's a significant variety of economical lever.This paper analyzed the changes of RMB exchange rate on China's trade balance by using the elasticity approach theory and revenue approach theory. Verify whether Marshall-Lerner Condition and Harberger Conditions are set up in China. The study uses the bilateral monthly data from June 2005 to May 2009. Focus in the effects of RMB exchange rate movements on the Sino-US trade balance.This paper has studied the short-term and long-term influence of real exchange rate of RMB on China's trade balance using the methods including the Cointegration Analysis, the Vector Error Correct Model(VECM), the Pulse Response Analysis and so on. It comes to the conclusion that, Marshall-Lerner condition can hold, Harberger condition also can hold, while Harberger condition can not hold when the foreign echo effect exists, that is, China's trade balance can't be regulated effectively through real exchange rate of RMB now.It is impossible to resolve Sino-US trade deficit, depending only on the movement of RMB exchange rate. Only by adjusting the domestic trade structure can we realize the substantial development of our country's foreign trade.