A VAR Study On The Relationship Between China’s Real Estate Price And The Exchange Rate Of RMB

In recent years, with China’s fast economic growth, the real estate industry has been developing rapidly and the housing prices has continued rising. From July2005when China started the implementation of the foreign exchange rate reform to December2012, the RMB exchange rate has appreciated a total of more than30%. The huge surplus of China’s international trade balance of payments and the rapid increase of its foreign exchange reserves have caused strong appreciation pressure for the RMB. International capital is coming into China’s real estate market through various channels for both the huge return of real estate industry and expected appreciation of the RMB. Its proportion has scaled new heights and constitutes as a potential threat to the housing price stability and financial system’s safety. This thesis attempts to focus on how the exchange rate volatility plays its role in real estate market through the international short-term capital movements.After the introduction of the theory on factors affecting exchange rate and real estate price decision, the thesis firstly is dedicated to conducting an equilibrium model using foreign exchange rate, asset price and international capital movements under the condition of open economy. Secondly, on the basis of economic theory, the thesis points out that exchange rate fluctuation primarily affects real estate prices through the expected effect and the liquidity effect, the wealth effect, the effects of inflation and credit expansion effect and other mechanisms. According to the econometrics knowledge, this thesis starts with the reference to the price index of real estate nationwide from July2005to December2011, the monthly data of Nominal Effective Exchange Rate, Exchange Rate expectation and Short-term international capital flow. Then it establishes the Vector Auto Regression model and introduces the Granger Causality Test, Co-integration test, as well as Impulse Response Function. The empirical results suggest that in the long term, the RMB foreign exchange rate, exchange rate expectation and the short-term international capital flow work together to push the rise of house prices. In the short term, exchange rate expectation and short-term international capital flow have more important impact on the price factor. Through looking back on the history of Japan and Thailand when the fluctuation of exchange rates led to the bubble of real estate prices, the thesis attempts to draw upon related experience and learn from their lessons. Finally, it safely comes to the conclusion that on the one hand, the monetary authorities should deepen the reform of the RMB exchange rate system, strengthen the supervision and guidance of capital movements, and take control of China’s real estate credit. On the other hand, government policy authorities should suppress land prices, guide the public’s reasonable expectations, enhance the affordable housing work and limit the speculative activities on real estate market.