RMB Exchange Rate Impact Analysis Of The Trade Balance In China

As the second largest international-trade country in the world, China with itsenormous trade volume has very huge and unique impact on the overall worldeconomy. At the same time, RMB exchange rate has been the target of the trade warbetween China and others. For instance, the U.S. government is convinced that RMBis being de-valued and its trade deficit should fall if RMB appreciated against U.S.dollar. The fact is China’s trade surplus is still rising while RMB has been appreciatedfor over30percent these years after the exchange rate reform.This essay first introduces by graph and table about China’s international tradeafter reform and openning-up from three aspects:total volume, trade balance and eachitem under the SITC classification, and RMB’s exchange rate against U.S. dollar.Then comes theories about exchange rate’s effect on trade, include ElasticityApproach, Absorption Approach, Exchange Rate’s Price Conduction Mechanism andthe Time-Lag Effect. Econometric model is established between RMB Real EffectiveExchange Rate(REER) and trade balance, in order to find out the impact of exchangerate on international trade.The prospective conclusions are presented:The REER has opposite impact ontrade balance figure, the total trade balance has a elasticity index of-0.47255forREER. The two items react differently: the REER has little impact on the primarycommodities while the industrial products has a elasticity index of-0.887822forREER. Impulse Response Analysis shows that the total trade balance reacts moresmoothly and last shorter than industrial products toward the REER shock, and itsrecovery process vibrates up and down while the industrial product recoversstraightly.