Study On The Impact Of RMB Exchange Rate On China’s Foreign Trade And Its Fluctuation

Foreign trade is an important factor which drives China’s economic development.After entering WTO in2001, however, China’s foreign trade surplus has increasedyear after year, while developed countries’ calls for RMB appreciation have alsobecome increasingly louder. Foreign trade theory maintains that a country’s currencyappreciation will boost imports while reduce exports and thus lower trade surplus.However, the relationship between foreign trade and RMB currency value fluctuationin China is not as simple as stated in economic theory. In the context of accumulatingpressure on RMB appreciation, this research explores the impact of RMB realexchange rate (RER) on China’s imports and exports by combining both theories andempirical analysis. Taking the quarterly data from Q32005to Q42010ofimports andexports between China and its major trading nations, the bilateral RER, China’s GDP,major trade partners’ GDPs, and major trade partners’FDI to China as analysisobjects, this research first of all builds China’s import demand equation and exportdemand equation to analyzes the impact of RMB RER on China’s foreign tradethrough elastic analysis. Then impulse response function and variance decompositionare adopted to analyze whether RMB RER fluctuation has long-term impact onChina’s imports and exports as well as the contribution rate of RMB RER and otherfactors in the fluctuation of China’s imports and exports. Through analysis, thisresearch concludes thatthe impact of bilateral real exchange rate on imports andexports differ as country changes. Taking China’s exports and imports as a whole,RMB RER’s appreciation will raise China’s imports and reduce exports. Impulsefrom RMB RER will have long-term negative impact on China’s foreign trade andhave high contribution rate to the fluctuation of China’s foreign trade.