Analyze Of Sino-Australian Currency Corporation Effect On The Bilateral Trade And Investment

Free Trade Agreement between China and Australia was put into use in 2015 which also originated currency cooperation between the two countries. The paper theoretically and empirically analyzed the effects of RMB exchange rate changes on trade between China and Australia and tried to explore potential opportunities for future bilateral trade and investment. The paper went over relevant literature on relationship between exchange rate changes and investment, exchange rate changes and trade structure, exchange rate pass-through mechanism and choices of denomination currency. Based on previous research, the paper focused on effects of RMB exchange rate changes on bilateral trade between China and Australia. In empirical tests, FDI, per capita income, tariff rates, real wages, and so on were taken into account. Since US Dollar and Australian Dollar were main denomination currencies used in trade between China and Australia, the paper adopted real effective exchange rate to test its impact on bilateral trade between China and Australia. This paper also took into account changes in Australian trade denomination currency in the past decades.This paper adopted multivariate regression model to investigate how exchange rate changes affected trade volume between China and Australia and focused on the relationship between exchange rate changes, denomination currency and trade. Several important conclusions were reached. Firstly, after the reform on RMB exchange rate regime, increase in real effective exchange rate promoted bilateral trade between China and Australia. RMB appreciation increased import purchasing power of Chinese residents and firms and enlarged their import volume from Australia. Even after considering economic scale of China and Australia, the ratio of bilateral trade to total trade volume, Australian FDI in China and Australian tariff rates, the effect of RMB exchange rate changes was still significant. Secondly, the share of US Dollar and Australian Dollar used in Australian imports had significant effects on total trade volume and goods trade volume between China and Australia. It can be predicted that changes in denomination currency in trade between China and Australia and reduction in tariff rates would stimulate future trade and investment between China and Australia.