A Comparison Study Of The Effects Of RMB Exchange Rate On Foreign Exchange Reserve Pre And Post The Exchange Rate Mechanism Reform

As two important economic variables in a open economy, RMB exchange rate andforeign exchange reserves have a complex relationship. The relationship betweenexchange rates and foreign exchange reserves on the discussions and research areconstantly evolving. With the wave of global economic integration, deepening andopenness of national economies to strengthen, the relationship between them isbecoming more significant.Since July2005, the RMB exchange rate formation mechanism reform more thanseven years, appreciation of the RMB become an important component of theeconomic and people’s life. With the expansion rate of appreciation, if the exchangerate changes would have a significant impact on the level of foreign reserves stabilitybecame the focus of discussion. Using monthly data from January2000to March2011, the constructor of China’s foreign exchange reserves growth factors affect themechanism for RMB appreciation on China’s foreign exchange reserves, and toconstruct a reasonable lag model. And samples before and after the exchange ratereform, the district is divided into two stages (January2000to July2005, August2005to2011in March).The results can be drawn from the empirical analysis in the5%significance level, theforeign exchange reserves growth and nominal effective exchange rate, domestic andinternational levels of economic growth between the expected appreciation of theexistence of a long-term equilibrium co integration relationship. In the sample periodforeign exchange reserves, negative correlation between the level of the RMBeffective exchange rate, reduction of the RMB effective exchange rate has led to theexpansion of China’s foreign exchange reserves, reduced by1%when the effectiveexchange rate of RMB, China’s foreign exchange reserves expanded by2.16%, andthe relationship significant. Showing a positive correlation between the level offoreign reserves of the RMB effective exchange rate in the two samples with theupgrading of China’s effective exchange rate of RMB, China’s foreign exchangereserves are also a further expansion, when the appreciation of the nominal effectiveexchange rate of1%, China’s foreign exchange reserves grew2.6712%, however therelationship is not very significant.In the short-term fluctuations of the vector error correction model analysis, the sampleone and sample two, the RMB effective exchange rate of the first difference lag has a positive impact on China’s foreign exchange reserves growth, however, comparedwith the sample, the sample period, the RMB effective exchange rate appreciation inthe short term to play an important role in the growth of China’s foreign exchangereserves. Thus, the J-curve effect can be seen in two samples during the more intense.The impulse response function and the equation decomposition function, comparedwith the sample, sample two during the appreciation of the renminbi is expected tomore obvious role in China’s foreign exchange reserves, the greater the contributionrate of fluctuations in foreign exchange reserves growth. Expected appreciation of therenminbi continued, resulting in the growth of China’s foreign exchange reserves.Finally, based on empirical results and cause analysis, and combined with the currentdomestic and external circumstances, I am trying to present some recommendations ofthe appreciation of the renminbi towards foreign exchange reserves growth.