Research On The Causes Of RMB’s External And Internal Value Deviation And The Influence On The Chinese Economy

According to the theory of Purchasing Power Parity, the external value and internal value of a national currency should change toward the same direction. Generally, the external value of the currency can be measured by the effective exchange rate, while the internal value can be measured by the domestic general prices. So based on the theory the domestic general prices should drop when the effective exchange rate appreciates, and vice versa. Recent years, based on the performance of RMB’s effective exchange rate, Chinese domestic CPI and assets prices, we found that there is a time the RMB’s effective exchange rate appreciates while the CPI depreciates, which failed to meet the classic economic theory. Before studying the phenomenon in deep, we need to understand the relation between the external and internal value of RMB, and investigate whether the other countries exist this phenomenon. On this basis, we can start to analyze the reason and effect of this phenomenon.Firstly, this article organized the moving trends of external and internal value and divided it into eight time periods. We found that two periods exists the deviation between external and internal values of RMB. Then we tested the performance of32developed and10developing countries’currency values, and found the developed countries had the deviation in1980s to1990s, while the developing countries had it after1990s. Then we made analysis on the reason and economic effect of RMB’s value deviation, and came to some conclusions. We believe that the appreciation expectations of RMB, money suppty, surplus of balance of payments and economic growth are the direct factors, while asymmetry in policies related to foreign economy, prices of production factors being underestimated, imbalance in the economic development and the limitation on the hypothesis of the PPP theory are the essenc reasons to this currency phenomenon. In addition, this article made empirical analysis through the perspective of foreign exchange reserves, and the result approved the former research. In terms of the economic effect, we think that RMB’s external and internal value deviation have an adverse influence on the import and export trade, foreign direct investment, profits of export enterprises, employment and economic growth. Additionally, it may encourage the international hot money to flow into China, and bring challenges to China’s monetary policy. At last, we gave a certain amount of policy recommendations based on the analysis.In this article we came to three conclusions:(1) organized the relationship between RMB’s external and internal value based on time, and compared the currency’s external and internal value of other countries, found that the RMB value deviation doesn’t only exist in China.(2) analyzed the direct and essence reasons of the RMB value deviation, and made the empirical analysis based on the balance of payments.(3) found that the RMB value deviation have an adverse influence on China’s economy, therefore policies are needed to response the effect.