Measure And Empirical Research Of China’s Exchange Market Pressure

With the strengthening of global economic integration, the economic ties between the countries are increasing. As one of the relative price currency translation, Exchange rate is also increasingly national attention. Looking into the progress of global exchange rate change, the disintegration of the Bretton Woods system was a landmark event in the era of floating exchange rates. Since then, the exchange rate began to play an important role in a country’s economic activity and in the international balance of payments regulation.Before1994,itis a special time for China to exchange rate system from a fixed exchange rate system to a dual exchange rate system. Since July21,2005, China has announced to improve the RMB exchange rate mechanism reform and began to implement a adjusted and managed floating exchange rate system based on market supply and demand and referenced to a basket of currencies and economic and financial situations of domestic and international.The exchange reform of the exchange rate of the RMB against the U.S. dollar was set to8.72:1which was one-time depreciation of33%compared to the previous official exchange rate "5.7:1".It made our economy onto the path of development of foreign trade-pull and foreign exchange reserves began to further increase.By2010China had become the world’s second-largest economy which was only after the United States. Exports ranked the first in the world and imports ranked the second. China had increasingly played a pivotal role in the international economic arena. At the same time, in recent years, the RMB is facing a lot of pressure to appreciate. As our policy is a managed floating exchange rate system, China’s central bank is often forced by pressures to enter the foreign exchange market to intervene in order to maintain a general stability of bilateral exchange rate between the RMB and the U.S. dollar. But how should the central bank intervene the foreign exchange market? This is often closely linked to a national monetary policy. But on the other hand, it also has a deep relationship with the central bank’s judgment if a country is facing the pressure of the foreign exchange market. Therefore, evaluations of the foreign exchange market pressure has great research significances for our RMB exchange rate and strategy guidance of the central bank’s foreign exchange intervention which can scientifically estimate the pressure of the appreciation or depreciation faced by a country’s foreign exchange and also can be a scientific measure of the extent of a country’s central bank intervention in the foreign exchange market which can provide objectives and strategy indicators of the actual operations for the central bank.In this paper, we focus on the foreign exchange market pressures. Firstly, we reorganize the foreign exchange market pressure index measure method research literature in accordance with the common two methods-model dependent and model-independent-in turn be classified in accordance with the domestic and foreign. We review the development of two measuring method systematically, construct the framework of this paper and select a measure model which fits the actual situation in China based on the cutting-edge theory of this problem.Secondly, we introduce the model dependent method and non-model dependent method of measuring the pressure of foreign exchange market, both the static and dynamic approaches to calculate conversion factor in model dependent method. We present the advantages and disadvantages of both approaches. We improve the model based on actual situation of China, which provides a theoretical basis for subsequent empirical research.Then we use a two-stage least squares method and the time-varying parameter regression estimation method for empirical research on three models measuring foreign exchange market pressures, which is established on the second chapter, and we analysis the statistics result combined with the actual situation of China.Thirdly, we have a comprehensive comparative analysis of the three types of measurement methods. China’s foreign exchange market pressure is negative mostly and suffers from upward pressure for long-term. We explore the reason from the multiple perspectives of the system, economic growth, balance of payments, foreign exchange reserves and international politics. And we try to find the possible effects of this negative pressure on China’s exports, industrial upgrading, and foreign exchange reserves shrink, employment, etc.Finally, based on a comprehensive, in-depth research in the foreign exchange market and combined with China’s specific conditions, this article provide some specific recommendations on easing the foreign exchange market for government to make reference to, including deepening the reform of the exchange rate regime, transforming the economic growth mode and some other angles.