An Empirical Study Of Impact Factors Of The RMB Exchange Rate Under The Current Exchange Rate Regime

The people’s bank of China announced to reform RMB exchange rate regime on July21,2005, which means RMB exchange rate becomes more and more marketable. Fromthen on, the CNY/USD exchange rate shows a steady appreciation trend, while the RMBexchange rate against other major currencies has ups and downs. Based on the complicatedRMB exchange rate fluctuations status, the article uses the national income, inflation rate,money supply, rate, foreign exchange reserves and foreign direct investment as the initialvariables to build the VAR structure on the empirical way. This paper makes deep analysison the major economic factors which affect the fluctuations of RMB exchange rate andidentify the strength of factors’mutual influences in the context under the current exchangerate system.The VAR analysis results show that factors like GDP, CPI, the difference betweenChinese and USA interest rate, money supply, foreign exchange reserves and foreign directinvestment have a long-term impact on RMB exchange rate under present exchange rateregime. As a result, from the empirical analysis we can make the following conclusions:the growth of GDP, CPI have reverse relation to RMB exchange rate; the differencebetween Chinese and USA interest rate, money supply, foreign exchange reserves havepositive relation to the RMB exchange rate; foreign direct investment has reverse relationto RMB exchange rate. Lastly, this paper gives some suggestions, on the basis of theempirical analysis, to adjust the economic factors so as to make the RMB exchange ratechanges within a rational range. Besides, the paper also makes an outlook on the furtherreform of the RMB exchange rate.