Research On The Linkage Relationship Between RMB Exchange Rate Changes And Short-term Cross-border Capital Flows

In recent years,government's surveillance on capital account is decreasing in China.With the internalization of RMB after joining in SDR,its role in international settlement becomes more and more important.Under this background,the restriction for foreign capital entering into Chinese market is reducing so numerous capital flows into the market.This brings financial support to the development of Chinese manufacturing industry as well as negative affection for domestic economic development,which includes pressure on inflation,bubble of stock market and unstable changes on bulk commodity market,etc.· At the same time,cross-border capital flow accelerates fluctuations of exchange rate.In 2015,Federal Reserve System enters into rate hike cycle,which leads to big changes on exchange rate like fast depreciation of RMB and outflow of China's foreign exchange reserve.For example,the sum of foreign exchange reserve flowing out reaches to one trillion dollars within one year.Thus the government has to reform currency rate under the market pressure.The occurrence of similar events are enough to prove that big scale cross-border capital flow in short term can disturbs the stabilization of national economy and foreign exchange market,and the damage is hard to evaluate.Therefore,we need to figure out the principles and connections between those factors,take preventive measures in advance so we can control the risk.In the second part,based on theories,the thesis explains the main reasons causing cross-border capital flow are:interest rate motivation,exchange rate motivation,and demand of asset portfolio.The main reasons causing changes of RMB exchange rate are:interest rate parity,balance of international payment,supply and demand of currency,people's expectations etc.And these changes will influence foreign exchange market,currency market,and domestic prices.In the third part,historic data from 1998 to 2017 is used to prove these reasons.The interest rate is the main reason that causes the changing of exchange rate and short-term cross-border capital flow before 2008.After that,the influences of currency's supply and demand as well as asset portfolio are increasing.Also,the investor's expectation in the market accelerates market deterioration and inflation.In the fourth part,through comparison,the thesis selects exchange rate data of RMB against the USD and short-term cross-border asset flow data from 1998 to 2017.Also,the price disturbing of stock market and real estate market is used to demonstrate the relationship between the two parties.The financial crisis in 2008 works as a dividing timeline so the relationship between interest rate and cross-border capital flow in short term is analyzed in two different stages,before 2008 and after 2008.After statistic analysis and description towards targeted subjects,we can find that the scale of cross-border capital flow in short term is bigger after 2008 and the factors affecting cross-border capital flow are more complicated.Before 2008,our capital account was restricted and experienced a process of opening with small relative flow.Especially after exchange reform in 2005,the changes of exchange rate are obvious.With opening of capital account and affection of American financial crisis,cross-border capital flow in short term becomes frequent and usual.This paper analyzes short-term cross-border capital flow's influence on exchange rate,as well as difference of exchange rate's affection on stock market and real estate market through Eviews and empirical analysis of VAR Model.It is discovered that the changing of exchange rate and cross-border capital flow's relationship with real estate market is not the same before 2008.Short-term cross-border capital flow is not enough to threat domestic asset,but it becomes the main factor that makes house price higher and accelerates the bubbling of stock market.We find that exchange rate mechanism led all by market and the way of short-term cross-border capital flowing is not feasible so government's intervene and proper management are needed to avoid the spread of risk.When the market fluctuates in a large degree,strengthening supervision and deducing market's influence are one of the final ways to control risk.Finally,based on the analysis,the thesis raises the suggestions:1)adjust RMB exchange rate mechanism to be more flexible and reasonable.Made the market decide the changing range of RMB automatically to promote the flowing of short-term cross-border capital changing with the supply and demand of the market;2)strengthen foreign exchange management to replace marketization management so the negative influence of hot money will be lessened.In this way,foreign direct investment can keep stable in a long term so the market will be stale and healthy.3)Strengthen global cooperation to supervise short-term cross-border capital flow to control the risk;4)Promoting outflow of RMB to surrounding countries to reduce domestic hot money so the excess liquidity of our country can be relieved.The increase of securities rate in China and the improving of Chinese financial market's management make short-term cross-border capital flow stable so it will not affect exchange rate at a large degree and keep finance and economy stable.