An Empirical Research On Exchange Market Pressure Of RMB And Buffering Mechanism

With the global economic integration, the connection between the various countriesbecomes more and more inseparable. Accompanied by the collapse of the Breton Woodssystem, the world monetary system has entered the era of floating exchange rate, and theexchange rate fluctuations in the foreign exchange market will become the norm. Nowexchange rate is the most important comprehensive price index of a national economicactivity and also is an important leverage to adjust a country’s balance of payments. Thestudy with foreign exchange market pressure can not only help us advance identificationand warning of a potential currency crisis, but also estimate the appreciation ordepreciation pressure faced by RMB in the foreign exchange market, and then provides thePeople’s Bank of China to operate in the foreign exchange market a better forecastingindex. At present, research on EMP of RMB has not been due attention, whether inacademia or at the policy level. Facing to the current economic situation and the issue ofEMP of RMB, to expand the research on the RMB pressure in the foreign exchange markethas great significance.In this paper, EMP(exchange market pressure) is studied. At first, the purpose andsignificance of this study is illustrated. Secondly, the EMP theory and research literature athome and abroad are reviewed. At last, this paper analyzes the internal and external causesthat generate foreign exchange market pressure. The external reasons are the pressure ofthe international community and the sustained depreciation of U.S. dollars. Internal reasonsare as follows: China’s rapid economic growth; international balance of payments surplus;huge foreign exchange reserves and the impact of hot money; high inflation; Chinese andforeign interest rate differential, as well as the market expectations. Then based on thegeneral definition of exchange market pressure brought forward by Weymark (1995), thispaper makes use of qualitative and quantitative research method to calculate China’sforeign exchange market pressure index. The quantitative analysis methods used in thispaper include the ADF and PP unit root tests, as well as the two-stage least squares (TSLS).The article adopts the small open economy model which is consistent with China’s actualsituation. In addition, this paper estimates the structural parameters of the simultaneous equations by using two-stage least squares (TSLS). Furthermore, based on the empericalresults, the specific values of the exchange market pressure index towards RMB from1996to2011are calculated. Following the reasons for these calculation results are put forward.After the specific analysis, this paper finds that China’s foreign exchange marketpressure between1996and2011may be divided into three stages. The first stage started in1996and ended in1998. At this stage, the foreign exchange market pressure showed anupward trend. China’s exchange rate reform in1994was responsible for this. The secondstage, from1999to2005, China’s foreign exchange market pressure presented a downwardtrend. This was mainly because the hit brought by the Asian financial crisis whichhappened in1997towards the world economy. At the same time, Our governmentannounced “no devaluation of RMB”. So at this stage the exchange market pressure isrelatively small. The third stage, since2005, an upward trend emerged in China’s foreignexchange market pressures. And this pressure is increasingly expanding. This is becausethe reform of China’s exchange rate policy in2005.The expected appreciation of RMB isrelatively strong. Coupled with the outbreak of the global financial crisis in2007caused bythe U.S. Subordinated Debt crisis. These factors jointly caused the upward trend of China’sforeign exchange market pressures. The empirical analysis is also utilized to analyze thefactors affecting the foreign exchange market pressure index, using a structural vector autoregression model.Finally, the corresponding policy recommendations are put forward to eliminate theEMP of RMB. Our country should change the economic growth pattern; improve theforeign exchange sterilized intervention system; deepen the exchange rate reform andperfect the related mechanisms; make use of the foreign exchange reserves reasonably;reduce trade frictions and improve the foreign trade environment; strengthen the foreignexchange regulations and prevent hot money inflows; make reform of distribution systemand establish a sound social security system; Speed up the process of marketization ofinterest rates.