The “Deflation Effect” And China-US Trade Balance Under The Expectation Of RMB Devaluation

After the reform of the RMB on Aug,11 th,2015,the People's Bank of China introduced more flexibility to the China's exchange rate mechanism,which will take both the exchange rate of RMB against the U.S.dollar and a basket of foreign currencies.Thus,the expectation of RMB devaluation subsequently came into being which was self-fulfilling as well.Statistics from IFS of IMF showed the exchange rate of RMB have devaluated for 13.40% from 2014 to 2016.According to traditional trade theory,currency devaluation will lead to an increase of trade balance by promoting export and discouraging import.However,during the period the China trade surplus against US didn't increase,even emerged the tendency of decline,which was inconsistent with traditional trade theory.As a result,research on exchange rate of RMB and the China–US trade balance has great meaning both in theory and reality.This paper introduces the expectation of exchange rate and its influence on trade behavior and consumption behavior,puts forward the concept of “Trade Deflation Effect”,then analyzes its influence on Exchange Rate Pass-through and the fluctuation of trade balance.Firstly,a theory model is established to derivative the expectation of devaluation's influence on trade balance logically.It utilizes the “Deflation Effect” to explain the mechanism of the inconsistency mentioned above.On the other side,this paper utilizes Sino-American data and ARDL model to verify the Marshall-Lerner Condition,Exchange Rate Pass-through and the relationship between exchange rate of RMB,expectation and China–US trade balance.The empirical conclusions are:(1)The Marshall-Lerner Condition is satisfied and the Exchange Rate Pass-through effect has significant influence on export prices,which means that the prerequisite of the traditional trade theory is exist;(2)However,the depreciation of RMB didn't improve the China trade surplus against US,there is no evidence for J-Curve Effect either.Instead,the depreciation deteriorates the trade balance;(3)The expectation of depreciation of RMB leads to the decline of export price of China continually,which makes the imports and consumers of U.S postpone their import and consume on Chinese commodities because of the utility-maximizing rule.As a result,the expectation deteriorates the China–US trade balance and verifies the concept of “Deflation Effect”.The policy enlightenment includes:(1)The People's Bank of China should enhance the expectation management of the exchange rate of RMB.The continually expectation of RMB devaluation should be avoid.The expectation will deteriorate the China–US trade balance,especially through the export side,it's necessary to avoid the influence of “Deflation Effect”.(2)RMB exchange rate mechanism should be introduced more marketization and liberalization.The government should reduce interference to avoid distorting the self-adjustment of market.