A Study On The Impact Of RMB Exchange Rate Regime Reform On China 's Trade Balance

As the price of a currency, exchange rate is an important kind of asset prices. Its changes have had significant influence on international trade, capital flows and the macro economy. Due to the highly economic dependence on the export trade, the role of exchange rate is particularly important to China.Ever since the reform and opening up, the RMB exchange rate regime has had roughly experienced several large-scale reforms, which led to the changes of exchange rate formation mechanism as well as the exchange rate itself. And it has been proved that the reform of RMB exchange rate regime had improved the trade condition and promoted China’s economic growth.However, due to the too much focus on U.S. dollar against other currencies, the RMB exchange rate remains slight fluctuations against the U.S. dollar while violently against other trade currencies, which results in the real effective exchange rate’s volatility. It was demonstrated particularly during the financial crisis in2008and the debt crisis in Europe in2011, when the RMB real effective exchange rate rose sharply with the U.S. dollar, and hit China’s export trade severely. Therefore, it is necessary for the further perfection for the RMB exchange rate regime in term of effectiveness of international balance of payment.As to the further reform of China’s exchange rate regime, many scholars have conducted a lot of useful research. Among all the research, the selection of the exchange rate formation mechanism is quite controversial, especially the current regime and the regime of "pegging RMB to a basket of currencies". This paper mainly discusses on the reforms of RMB exchange rate regime and their influence on the trade. After giving a brief introduction for the past reforms, we conducted qualitative analysis of the effects on trade and gave an objective evaluation on the past reforms. Then we performed the quantitative analysis of the import and export demand equation based on OLS regression method, and used the Fudan RMB mock exchange rate index to conduct the mock analysis under the regime of pegging RMB to a basket of currencies. Finally, the corresponding policy recommendations are given, that is to maintain a basically stable effective exchange rate, and to peg the RMB to a basket of currencies rather than referring to them and regarding US dollar as a main reference. As for the pegged exchange rate system, we should peg RMB to a certain target area rather than to a basket of currencies strictly.