An Analysis Of The Effect Of The Movements Of RMB Exchange Rate On China's Foreign Trade Before And After The Reform Of RMB Exchange Rate Regime

Since China's domestic reform and opening-up policy has been implemented more than 30 years, RMB exchange rate regime has experienced two important reforms----the official RMB exchange rate made uniform with the market rate in 1994 and the reform of RMB exchange rate regime from a fixed system to a more flexible system in July 2005, respectively. This master's dissertation focuses on the analysis of the effect of the movements of RMB exchange rate on China's foreign trade before and after the reform of RMB exchange rate regime in 2005.With regard to this topic, this master's dissertation gives a brief introduction about the background and the meanings of this selected topic, and makes a summarization of the research and analysis domestically and abroad related to this topic. At the end of this chapter, this master's dissertation demonstrates the framework, the methods used in the analysis and some new findings of this topic but also some lacks and omissions needed to be filled further.Since the reform of RMB exchange rate regime from a fixed system to a more flexible system in July 2005, RMB has been appreciating about 25% to US dollar. In the mean time, China has been keeping trade surplus these years. By the end of 2010, the China's total volume of trade has reached 2972.76 billion US dollar, and China's trade balance has reached a surplus of 183.1 billion US dollar. In general, the appreciated RMB does not significantly change China's trade balance. However, due to the sustained trade surplus, there is hidden trouble in China's economy. Therefore, a study of what effect of the change of RMB exchange rate will have on China's trade balance has an important practical significance.Traditional theories about what effect the exchange rate will have on the foreign trade includes Marshall-Lerner Condition, the J-Curve Effect, Absorption Approach, etc. These theories will be briefly introduced in Chapter 2, and they will be used in the following practical analysis as theoretical supports and references. In the general financial principle, the appreciation the currency of a country will promote the exports of that country; and vice versa. However, from the perspective of the practical situation in China, this principle does not provide a good explanation. So in Chapter 3, this master's dissertation will show the movements of RMB exchange rate in three important periods and the effect of its movements in each period on China's foreign trade and compare the results year by year. We conclude that in different periods, the movements of RMB exchange rate have different effects on China's foreign trade and we also make a raw conclusion that the reform of RMB exchange rate regime in 2005 does not significantly have an effect on China's foreign trade.But only the above qualitative analysis is not enough to show the insignificance. So in Chapter 4, this master's dissertation, based on RMB exchange rate data and China-US trade data before and after the reform of RMB exchange rate regime in 2005, using a long-term model and a short-term model respectively, will make an empirical study to enhance our conclusion made from the study in Chapter 3, and the empirical study results show the insignificance in a quantifiable manner. And after that, this master's dissertation gives some reasonable explanations about why the reform of RMB exchange rate regime in 2005 does not significantly have an effect on China's foreign trade, as well as some factors other than RMB exchange rate that does affect China's foreign trade.Based on the above combination of qualitative analysis and quantitative analysis, we find out some of the major reasons that cause the insignificance of the effect the reform of RMB exchange rate regime in 2005 has on China's foreign trade. These reasons are all about China's policies in respect of RMB exchange rate and foreign trade. These policies have some degree of drawbacks, and in Chapter 5, the final Chapter, this master's dissertation makes some comments about the existing policies, and according to some drawbacks of the existing policies, this master's dissertation makes some policy advisements for references to the effect of the movements RMB exchange rate have on China's foreign trade, and that concludes this master's dissertation.