Study On The Effects Of RMB Real Effective Financial Exchange Rate Movements On Portfolio Flows In China

The Bretton Woods system collapsed in the 1970 s,while in today's world with the ever-deepening of economic globalization and financial liberalization,China has constantly accelerated the pace of the reform of the RMB exchange rate system.Thus the flexibility in the RMB exchange rate has become much greater with drastic two-way fluctuation.At the same time,the scale of portfolio flows,whose fluctuations often have a profound impact on economic and financial stability,is increasingly expanding in China.Against this backdrop,it is important to explore the effects of RMB exchange rate movements on China's portfolio flows in order to understand the exchange rate policy better and maintain the stability of the domestic financial market.Firstly,this paper establishes the theoretical foundation of exchange rate changes affecting portfolio flows according to the Modern Portfolio Theory.Referencing to the Portfolio-rebalancing Effect and the Reversal Effect plus Return-chasing Effect,the exchange rate changes have a positive impact on the portfolio flows.However,the Momentum Effect plus Return-chasing Effect makes the result opposite.Secondly,it cannot measure changes in RMB's real value from the angle of capital since the traditional RMB exchange rate index is created based on the volume of China's foreign trade.As a result,it cannot either reflect the impact of RMB exchange rates on certain variables of capital market effectively.This paper replaces the trade data with capital ones to calculate the weight,and replaces the commodity price index with the financial asset price index to compile the real effective financial exchange rate index of RMB,which refers to REFER.Comparisons between REFER and traditional RMB exchange rate index compiled by BIS have been made as well.Next,on the basis of analyzing the trend of RMB REFER and the current situation of China's portfolio flows,it conducts an empirical study on the relationship between RMB REFER and China's portfolio flows through the VAR model,Granger causality test alongwith the impulse response analysis.As results indicating,during the period from 2003 to 2017,as the trend of RMB REFER and the traditional RMB exchange rate index compiled by BIS shows different degrees of divergence,it is imperative to use the capital data instead of trade data to construct the exchange rate index when measuring the influence of exchange rate changes on portfolio flows.There is a negative correlation between the change of RMB REFER and the net inflow of securities capital under the VAR model.That is,the rise of RMB real effective financial exchange rates will lead to the net outflow of international portfolio flows,which confirms the theory of Momentum Effect plus Return-chasing Effect.It is suggested that the RMB REFER should be integrated into the RMB exchange rate system,and the process of the market-oriented reforms of exchange rate and interest rate are expected to be speeded up for the purpose of adjusting portfolio flows dynamically.It is also necessary to establish a monitoring network to pay close attention to portfolio flows.