A Study Of The Real RMB Exchange Rate Based On Balassa-Samuelson Hypothesis

Since the reform and opening up, the RMB exchange rate showed a tendency of devaluation before1993and an oppositely rising trend after1993. Especially during the period of2005-2011, the RMB exchange rate appreciated unilaterally for seven consecutive years. At present, the market still has a strong expectation of appreciation towards RMB exchange rate. This kind of expectation mainly stems from two aspects:On one hand, the external pressure of western countries and international institutions asking for the appreciation of RMB; One the other hand, the intrinsic motivation of China’s sustained and rapid economic growth. The Balassa-Samuelson Hypothesis is a theory precisely reflecting the intrinsic motivation. Therefore, the article studies the related issues of the RMB real exchange rate from the perspective of the Balassa-Samuelson hypothesis.Firstly, the article starts from the brief description of Balassa-Samuelson hypothesis in order to reveal the theoretical basis of the theory and summarize the content, logic system and the main conclusions of the Balassa-Samuelson hypothesis. Secondly, the paper selects33years’data from1978-2010and uses empirical analysis to test the applicability of the Balassa-Samuelson hypothesis in China. Eventually Balassa-Samuelson hypothesis is confirmed in China through econometric methods such as cointegration, impulse response functions, variance decomposition. Next, according to the relationship between economic growth and exchange rate changes revealed by the Balassa-Samuelson hypothesis, this article predicts that the RMB exchange rate has an appreciation tendency in the long term. In addition, this article makes a detailed analysis about the advantages and disadvantages of appreciation. Finally, the paper points out that China should further accelerate the reform of the RMB exchange rate system confronted with the pressure of the long-term appreciation. Moreover, appropriate policy recommendations are put forward including reform objectives, strategies and supporting measures.With the acceleration of economic globalization, the improvement of economic monetization and the exacerbation of Chinese openness, the importance of the RMB exchange rate to Chinese economic internal and external balance is increasing. All aspects of the national economy are closely linked with the exchange rate. In addition, China has become the world’s second largest economy and RMB exchange rate movements will naturally affect the world’s other major economies. The fluctuations of exchange rate affect all aspects of the economy, such as trade balance, price level, capital movement, foreign exchange reserves, fiscal revenue, income distribution and international economic relations which relates to the overall development of the national economy. Therefore, the exchange rate has a very important significance.