Rmb Exchange Rate To Adjust Its Balance Of Payments Effect

Since early 2003, RMB appreciation becomes a very important issue that affects economic development and external relationship of our country. Regarding to this issue, there're three viewpoints: appreciation, stabilization and floating. The key point roots in internal as well as external imbalance along with the process of economic development. As one of the most important variables in a open economy, the change of exchange rate will affect its internal economy mainly through the balance of payment.This article will deeply analyze the impact of the exchange rate fluctuation on current, capital accounts and long-term equilibrium by choosing the balance of external payment as a start point of analysis, then discuss the feasibility of RMB appreciation and whether it would lead our country to the long-term external balance.Therefore, I'll divide this article into 5 chapters.Chapter one firstly introduces some viewpoints around this issue, then analyses the reasons of appreciation tension. In this chapter we raise the key issue that is being dealt with in this article, which is to be considered according to the current of exchange rate and the exchange rate system of RMB.Chapter two introduces the relationship between the exchange rate and the balance of payment, indicating that the imbalance is due to the contradiction between the two, which should be treated as the foundation for the following part of the article.Chapter three gives the theoretical analysis of the impact of exchange rate adjustment on the trade balance, then calculates the demand and supply elasticity of import and export. It could be found that appreciation of RMB would through its trade balance effect, terms of trade effect, and the effect of supply and demand in the foreign exchange market, cause a decrease of export value with a little proportion, but an obvious increase of import value. Therefore appreciation of RMB could correct the imbalance through increasing import without affecting export evidently, and at the same time, the terms of trade will be improved as well.Chapter four gives the theoretical analysis of the relationship between the exchange rate and the capital inflow. As calculated, the import and export induced by capital inflow increase simultaneously without making deficit on current account. Changing nominal exchange rate would reduce the scale of investment, but changing real effective exchange rate would affect more inflow of foreign capital, and cut down the surplus on current account and eliminate the imbalance of payment.Chapter five discusses, based on previous analysis, the way of appreciation—enlarge the floating range to 5-9% from the second half of 2004 to 2005, finally gives some policy suggestions.