The aim of this chapter is to present and analyze the related theories about both the unfastened macroeconomic theoretical account and the consequence of exchange rate motions on economic system. The concluding aim is to by and large give a comparatively more clear theoretical hints so that this can construct a good theoretical footing for the elaborate analysis in the following several chapters.

2.2. The unfastened macroeconomic simple theoretical account theory

Open macroeconomic theoretical account has ever been a really of import economic research field. Since World War II, the development of the unfastened macroeconomic theoretical account was chiefly reflected as the constitution of the unfastened macroeconomic simple theoretical account which is chiefly based on the KEYNES theories. After come ining the 1990s, the constitution of new macroeconomic theoretical account, which makes up the defects of early unfastened macroeconomic theoretical account. This article will chiefly mention to the cognitions of early unfastened macroeconomic theoretical account. So this article will chiefly present the unfastened macroeconomic simple theoretical account related theories.

The foreign trade multiplier theory is the initial application of unfastened macroeconomic simple theoretical account, this theory chiefly want to explicate that the addition of the exports can assist to better the degree of aggregative demand and spread out domestic employment.

In the unfastened macroeconomic system, the national income indistinguishable equation can be shown as follow:

Y= C+I+G+X-M ( 1 ) b. C=C0 +bY ( 2 ) c. M=M0 + mY ( 3 )

Yttrium is GDP, C is national ingestion, I is investing, G is authorities outgo, X is exports sum of goods and services, M is import sum of goods and services, X-M is net exports or trade balance. C0 is independent ingestion, B is fringy ingestion leaning. b= C/ Y ( 0 & lt ; b & lt ; 1 ) .

M0 is independent import, m is fringy import leaning, m= M/ Y ( 0 & lt ; m & lt ; 1 ) .

So the eventually equation is Y= ( C0 +I+G+X-M0 ) ( 4 )

So we can eventually acquire the foreign trade multiplier equation: K= dY/dX=1/ ( 1-b+m ) ( 5 )

The coevals of the foreign trade multiplier makes the import and export trade and national income to be closely linked. At the same clip, this equation is besides applicable to the foreign direct investing. Keynesians believe that a state ‘s export plays a really of import function in increasing national income merely every bit same as the domestic investing, on the contrary, import will cut down the national income. When goods and services are exported, the currency income obtained from the export will increase the income of export industry sector and the ingestion will be increased besides. This will necessarily take to the addition of the production of other sectors which are related to the export sector, the addition of both employment and income. The import merely plays an opposite function. So merely when a state has a trade excess, trade can increase a state ‘s employments and besides better the national incomes.

In add-on, based on the traditional unfastened macroeconomic theoretical account theory without sing the restraint of international payments balance, McCombie ( 1990 ) have summarized and acquire the undermentioned equation:

= ( 1/k ) ( wc+wI+wG+wX-wM ) ( 6 )

is GDP growing, , , , , represent independent ingestion, investing, authorities outgo, import and export alterations severally. The wc, Wisconsin, wG, wX, wM, these five variables represent the proportion of independent ingestion, investing, authorities outgo, import and export alterations severally in the GDP. Harmonizing to this Model, the addition of independent ingestion, investing, authorities outgo and export will take to the GDP to increase wc/k, wI/k, wG/k, wX/k, severally. The addition of import will take to the GDP to diminish wM. McCombie and some other economic experts have constructed a theoretical system which is used to analyze the impact of exchange rate alterations on the economic system during the development of unfastened macroeconomic theoretical account. The theory this articles used to set up a theoretical account in the 4th chapter is based on McCombie ‘s theory of the impact of exchange rate alterations on the economic system in the unfastened macroeconomic theoretical account theory.

2.3 The Main Theories of The Impact of Exchange Rate Movement On Economy

2.3.1The debut to this portion

The definition of national income Y in the unfastened macroeconomy is as follow:

Y=C+I+G+X-M ( C, I, G, X, M represent ingestion, investing, authorities expenditre, export sum, import sum severally ) . This portion will hold a brief theoretical debut chiefly concentrating on the five facets below:

The impact of exchange rate alteration on import and export trade

The impact of exchange rate alteration on FDI

The impact of exchange rate alteration on trade good monetary value

The impact of import and export trade on economic system

The impact of foreign direct investing on economic system

2.3.2 The impact of exchange rate alteration on import and export trade related theory

The celebrated theories of the impact of exchange rate alteration on the import and export trade chiefly include: 1. Marshall-Lerner Condition ; 2. Keynes ‘s Statical Import and Export Trade Model. Here this article will chiefly present the Marshall-Lerner Condition theory which is based on the angle of export demand monetary value snap.

The export demand monetary value snap theory Marshall-Lerner Condition

Marshall-Lerner Condition the theory which is used to analyze and analyze the impact of exchange rate alteration on a state ‘s international balance of payments. This status requires both foreign demand and domestic demand are more sensitive to the monetary value of domestic exported goods and the monetary value of foreign imported goods severally. To put EX as export snap, EM as import snap, we assume: 1. All other conditions remain unchanged, merely sing the impact of exchange rate motion on import and export goods ; 2. Does non see capital flows and the international payments equal trade payments. Based on the premise above, the undermentioned decision can be established: a. If EX+EM & gt ; 1, so the devaluation of local currency can better this state ‘s international balance of payments: B. If EX+EM=1, so the devaluation will non hold any influence on the international balance payments: c. If EX+EM & lt ; 1, so the devaluation will worsen this state ‘s international balance of payments. This is the celebrated Marshall-Lerner Condition

The basic significance of this status is when all other conditions remain unchanged, if both the import and export will has sufficient snap to the existent exchange rate, so the devaluation of existent exchange rate can advance the betterment of current histories.

2.3.3The impact of exchange rate alteration on FDI related theory

The bulk of the researches which are about the relation between the exchange rate and FDI have reached the same decision: by and large talking, the devaluation of the host state ‘s currency will excite the foreign direct investing influx and the grasp will take to a decrease of FDI influx. Here, we will chiefly hold a brief debut about the theory of the impact of exchange rate motions on the graduated table of FDI.

The impact of exchange rate motion on the graduated tables of foreign direct investing can be summarized as the undermentioned three mechanisms. The first 1 is wealth consequence: the wealth of the foreign investors will increase with the devaluation of the host state ‘s currency. Because from the position of foreign investors, if they measure the value of the capital based on the host state ‘s currency, so all the production and input such as labor, land and equipment will be cheaper after the devaluation of the host state ‘s currency. The eventually consequence is to promote more foreign endeavors to put and obtain more host state ‘s assets. Second, comparative production cost consequence: the maximal benefits the foreign investors get from the devaluation of the host state ‘s currency is the comparatively inexpensive production costs. The devaluation makes the production inputs costs which are purchased locally decline so that it can better the export-oriented foreign investors ‘ net incomes, high returns will of course increase the FDI inflows volumes.

2.3.4. The impact of exchange rate alteration on trade good monetary value related theory

Kassel ( G.Casse ) puts frontward the buying power para value theory in 1920. This theory makes exchange rate and monetary value the two variables to be most straight linked with each other at the first clip, so the buying power para value theory can supply a basic position to analyze the relationship between exchange rate and monetary value. The basic thought of buying power para value theory is: the value of currency rely on the buying power it has. The exchange ratio between different currencies relys on the contrast of their several buying power, it means that there is a direct nexus between exchange rate and different states ‘ monetary value degree. So, from the position of buying power para value theory, a state ‘s existent exchange rate ever remains unchangeable, existent exchange rate has liked the nominal exchange rate with the trade good monetary value together. Harmonizing the basic logical relation among the monetary value, nominal exchange rate and existent exchange rate. The relation between nominal exchange rate and monetary value is: the alterations of the monetary value will convey the same sum of accommodation of the nominal exchange rate in the opposite way. Conversely, the alterations of the nominal exchange rate will besides convey the same sum of accommodation of the trade good monetary value in the opposite way. The buying power para value theory reveals the relation between exchange rate and monetary value, which will hold a really of import directing significance in assisting to analyze the impact of exchange rate alterations on the domestic trade good monetary value.

2.3.5. The impact of import and export trade on economic system related theory

The theory about the impact of import and export on economic system chiefly focuses on the the impact of export on economic system. We can blossom from the following two facets:

First, it is based on the demand position to analyze the impact of export on economic system related theory. b.Secondly, it is based on the supply position to analyze the impact of export on economic system related theory.

( 1 ) Analyzing the impact of export on economic system related theory based on demand position

The analysis method which chiefly focuses on the demand position is besides called demand ace analysis method. This analysis method can be divided into two different analysis angles:

the first angle chiefly surveies the part grade of foreign trade to economic system. This angle emphasizes that both import and export are the portion of GDP. So the growing of both import and export can excite economic growing.

The 2nd angle think that some variables like ingestion, investing, authorities outgo, import and export are non independent with each other and there is a correlativity among these variables. This angle besides emphasizes that exports is non merely an endogenous factor to advance the economic growing but besides is a independent exogenic factors that exciting the economic growing.

( 2 ) Analyzing the impact of export on economic system related theory based on supply position

From the supply position, the publicity methods of the export trade to the economic growing chiefly include the undermentioned several facets: a.Some economic experts believes that export trade can force economic system through advancing the proficient advancement. b.The factor gift theory besides thinks that prosecuting in the production and foreign trade harmonizing to the comparative advantage of production factor gifts can better the constellation of the domestic production factors. Then, the eventually consequence is that it can force the economic growing.

2.3.6. The impact of foreign direct investing on economic system related theory

( 1 ) The direct consequence theory of FDI on economic system

The direct consequence of FDI on a state ‘s economic system can be reflected in the undermentioned four facets: First, FDI will direct go a portion of a state ‘s GDP. Second, FDI is an really of import beginning of support for the investing in the fixed assets. Third, FID will be given to take to a rapid growing in import and export. Fourth, FDI absorbs tonss of labour force and increase a state ‘s entire work force entire sums.

( 2 ) The indirect consequence theory of FDI on economic system

The indirect consequence of FDI on a state ‘s economic system can be reflected in the undermentioned four facets: First, the indirect consequence of the FDI on a state ‘s capital formation chiefly includes the industrial concatenation consequence. Second, the FDI can advance a state ‘s economic growing through upgrading the state ‘s industrial construction. Third, it is the engineering spillovers consequence of the FDI on a state ‘s economic growing.

2.4 The sum-up

The chapter chiefly reviews and analyses the related theories about both the unfastened macroeconomic theoretical account and the consequence of exchange rate motions on economic system. Through the reveiws and the introudction of the related theories, it is obvious that the motions of the exchange rate will surely hold a some impact on the economic system. The motions of the exchange rate can impact the economic system chiefly through the several economic variables including import and export trade, FDI and trade good monetary value. In add-on, this chapter besides reviews and analyses the related theories about the exactly dealingss between the import and export trade, the FDI and the economic system. This helps us have a better and further understanding how the exchange rate motions will precisely impact the economic system through the several chiefly economic variables. Through the reappraisals and analysis to the old related theories, it can make a good theoretical footing for the analysis in the undermentioned chapters.

Chapter 3: The Open Macroeconomic Model and RMB Exchange Rate Changes ( Economic Variables Selection )

3.1 The debut for this chapter

This chapter is chiefly based on the unfastened macroeconomic theoretical account theory to hold a theoretical and empirical analysis about the consequence of RMB exchange rate fluctuations on China ‘s economic system, choosing appropriate variables and survey through what sorts of chief variables does the alteration of the RMB exchange rate can impact the China ‘s economic developments. The intent for making this is to construct a theoretical footing for the mold and empirical analysis in the following chapter. There is a interaction relationship between exchange rate alterations and economic development. So we must foremost happen out what are the determiners of the RMB exchange rate alterations when researching the variable choice.

3.2 The determiners of the RMB exchange rate alterations

In order to analyze RMB exchange rate alterations, we must foremost analyze the basic factors that impacting the exchange rate and place the internal factors of RMB exchange rate alterations. Then, we should unite the macro-environment of the RMB exchange rate government to analyze the features and inclination of the exchange rate alterations.

Following, we will analyze the chief determiners of RMB exchange rate alterations.

3.2.1 The institutional factors of RMB exchange rate alterations

Since the reform and opening up, the exchange rate reform has besides experienced different sorts of direction manners. From 1982 to 1985, RMB exchange rate has adopted a double exchange rate government ( the coexistence of both the official exchange rate and trade internal trade colony exchange rate ) . Since 1986, the RMB exchange rate adopted both “ official exchange rate ” and “ foreign exchange barter market exchange rate ” coexistence government. In order to accommodate the demand of foreign exchange government reform, RMB exchange rate has already experienced important accommodations, such as, in July the fifth 1986, RMB exchange rate devaluated by 16 % , in November the seventeenth 1990, RMB devaluated by 11 % once more. In January the first 1994, China unified the RMB official exchange rate and market exchange rate, so China began to transport out individual and manageable drifting exchange rate government based on the market supply and demand. Since 2005, RMB exchange rate reform has been successful overall and the marketization grade of RMB exchange rate has been improved bit by bit. From the flexibleness of the exchange rate, we can see from July the 21th 2005 to the terminal of the February 2008, RMB has already experienced both grasp and depreciation periods against U.S. Dollar and RMB exchange rate has formed a bipartisan fluctuation inclination. In add-on, the cumulative grasp of RMB exchange rate has reached 14 % within merely 32 months. So RMB exchange rate drifting snap and flexibleness have been enhanced significantly. So we can see from the development of RMB exchange rate government that each development of the exchange rate government has already caused the different alterations in the RMB exchange rate. Therefore, analyzing the institutional factors of the RMB exchange rate will hold a really of import mention significance to research the farther tendencies of RMB exchange rate alterations.

3.2.2 The economic factors of the RMB exchange rate alterations

With the gradual sweetening of China ‘s comprehensive national strength, Transporting out a drifting RMB exchange rate government will be an inevitable tendency for the development of China ‘s exchange rate reform. However, the alteration of the currency value under a floating exchange rate government is chiefly determined by the relationship between supply and demand of the foreign exchange, that is to state that it is the market factors who will be the dominant factors. The major economic factors which will elicit the alteration in the RMB exchange rate in the current clip period can be summarized as follows:

1. International balance of payments status

The most direct or most specific factors that will impact a state ‘s exchange rate is the international balance of payments status of this state, which is the long-run factors that will find the exchange rate inclination. By and large talking, if a state has a international balance of payments surplus, the exchange rate of local currency rises ; on the contrary, the exchange rate falls. So how will the China ‘s future international balance of payments evolve and develop will straight impact the tendency of the RMB exchange rate.

( 1 ) Current points balance of payments status analysis

The alteration of current points balance of payment status will hold a bidirectional impact on the alteration of the exchange rate. For illustration, when the import of a state has increased or the state has a trade shortage, so the state will hold a extra demand for the foreign currency. This will do a diminution in the exchange rate of the national currency in the foreign exchange market. On the contrary, when a state ‘s current points have a trade excess, this can do the addition in the demand of this state ‘s currency from the foreign state and the growing of the foreign currency supply, the exchange rate of the state who has a trade excess will lift eventually.

Harmonizing to the RMB exchange rate inclination, we can see the cardinal support force that make the RMB exchange rate remain really stable inclination since 1995 is comparatively large-scale and stable trade excess from the current points ( see table 3.1 ) .

Table 3.1 The import and export trade volume in China

Year

Import and Export

Entire Volume

Export Total Volume

Import Total Volume

Trade Balance

1995

2808.6

1487.8

1320.8

167.0

1996

2898.8

1510.5

1388.3

122.2

1997

3251.6

1827.9

1423.7

404.2

1998

3239.5

1837.1

1402.4

434.7

1999

3606.3

1949.3

1657

292.3

2000

4742.9

2492

2250.9

241.1

2001

5096.5

2661

2435.5

225.5

2002

6207.7

3256

2951.7

304.3

2003

8509.9

4382.3

4127.6

254.7

2004

11545.5

5933.2

5612.3

320.9

2005

14219.1

7619.5

6599.5

1020.0

2006

17636.9

9690.8

7946.1

1744.7

2007

21738.5

12180.2

9558.3

2621.9

2008

25616.3

14285.5

11330.9

2954.6

2009

22072.2

12016.6

10055.6

1961.0

2010

29728.0

15779.0

13948.0

1831.0

2011

36420.7

18986.0

17434.7

1551.3

Beginning: The Statistical Yearbook of China from the National Bureau of Statistics of China functionary web site.

Note: The unit of the informations are in one hundred million U.S. Dollar

( 2 ) Capital points balance of payments status analysis

When a state has a really big sum of capital influxs, the extra supply of the foreign exchange in the foreign exchange market will take to the diminution of the foreign exchange rate ; Conversely, when the demand is more than the supply, the foreign exchange rate rises. For illustration, with the gradual enlargement of the graduated table of the foreign direct investing, the supply of the foreign exchange is more than demand, So the foreign exchange rate will fall and at the same clip this will besides do RMB exchange rate face a really large grasp force per unit area besides.

2. The degree of the involvement rate

The degree of involvement rates will impact the attraction of a state ‘s fiscal assets. The rise of a state ‘s involvement rate will do the state ‘s fiscal assets become more attractive to both the domestic and foreign investors. The concluding consequence will take to a capital influx and the grasp of the exchange rate.

Since the foreign exchange government reform in 1994, RMB exchange rate has carried out “ a individual and manageable drifting exchange rate government based on market supply and demand ” . The relationship among exchange rate, involvement rate and international capital flows has bit by bit been emerged. So with the uninterrupted addition of the involvement rate in China, this may speed up the guess activities of the international capitals that have been invested into China and it will eventually foster accelerate RMB grasp force per unit area.

3. The rising prices rate

The entire degree of a state ‘s currency values is an of import factor that will impact the alteration of the exchange rate. It will impact the fight of a state ‘s goods and services on the international market. The rising prices will play a indirect function on the exchange rate alterations chiefly through international balance of payments. If a state happens rising prices, currency depreciates and the trade good monetary values rise. Then, if the state does non the adjust the exchange rate, the fight of the state ‘s goods in the international market will cut down and the exports will worsen besides. And the eventually consequences will take to the decrease in the foreign exchange net incomes and the shortage of the international balance of payments. A significant rising prices in 1994 has brought about a immense impact on the depreciation of RMB exchange rate. ( see table 3.2 ) .

Table 3.2 1994-2010 CPI and existent effectual exchange rate index

Year

Consumer Price Index

Real Effective Exchange Rate Index

1994

124.1

82.6

1995

117.1

92.1

1996

108.3

101.2

1997

102.8

108.9

1998

99.2

114.7

1999

98.6

108.5

2000

100.4

108.5

2001

100.7

113.2

2002

99.2

110.6

2003

101.2

103.3

2004

103.9

100.5

2005

101.8

100

2006

101.5

101.6

2007

104.8

105.6

2008

105.9

115.3

2009

99.3

119.2

2010

103.3

118.7

2011

108.9

121.9

Beginning: The BIS and the National Bureau of Statistics of China functionary web sites.

Note: Th existent effectual exchange rate index informations is based on the footing of the existent effectual exchange rate index in 2005. In add-on, the rise of the existent effectual exchange rate means the grasp of the RMB exchange rate, conversely, the diminution of the exchange rate means the depreciation of the RMB exchange rate.

4. The awaited factors from the economic entities

As the progressively development of the fiscal market and the progressively enlargement of the international capital flows, the impact of expected factors on the exchange rate has become progressively apparent. Although China presently still implement comparatively more rigorous foreign exchange direction system, but the expected factors from different economic entities will still hold a really important impact on the RMB exchange rate. For illustration, today, because of some public sentiment from some economic entities like United States or some other research establishments, so, the grasp outlook of the RMB has been formed. Harmonizing to this outlook, some establishments or speculators will seek to alter foreign currency to RMB assets in order to gain the spread through different sorts of channels. So the concluding consequence will take to a greater grasp force per unit area for the RMB.

3.3 The variables choice of the unfastened macroeconomic theoretical account

In the unfastened macroeconomic theoretical account, the exchange rate dramas an really of import bond function, the alterations in the exchange rate affect the every variable in the unfastened macroeconomic theoretical account and so the exchange rate alterations will eventually impact the economic development through these assorted variables. Domestic and foreign researches normally think that the chief economic variables are the import and export trade, foreign direct investing and trade good monetary value and the exchange rate will chiefly impact the economic system by the tree chief variables. On the one manus, the exchange rate alterations will impact the economic development by the spillover consequence of the import and export trade and FDI. On the other manus, the exchange rate alterations will straight impact the both import and export points and investing points which constitutes the GDP by the trade good monetary value which will impact both the import and export trade good monetary value and the alterations in the cost of the FDI. The eventually consequences will do the economic development.

Following, following the elaborate theoretical analysis about the relation between RMB exchange rate alterations and the three chief variables below, we can cognize which variables will be the determiners that will impact the economic developments when the RMB exchange rate alterations so as to supply a logical footing for the mold.

3.3.1 The RMB exchange rate alteration and import and export trade

Since January 1994, China has implemented a individual and manageable drifting exchange rate government based on supply and demand. Then, RMB exchange rate has somewhat appreciated after that, U.S. Dollar depreciated from 8.62 RMB/Dollar in 1994 to 8.2 RMB/Dollar in 2005. In add-on, in July 21th 2005, China has besides carried out a manageable floating exchange rate mechanism, mentioning to a currency basket and based on market supply and demand, at the same clip, China besides announced that the exchange rate of U.S. Dollar against RMB was adjusted as 1 U..S dollar for 8.2 RMB and RMB exchange rat appreciated by around 2 per centum points.

So through twice accommodation of the RMB exchange rate, China has farther intensified the attempts of opening up to the outside universe, this has had a really of import function in advancing the development of the foreign trade with other states in the universe.

1. 1994-2005 RMB exchange rate alterations and import and export trade state of affairss

Figure 3.1 RMB existent effectual exchange rate alteration tendencies

Beginning: From the BIS functionary website statistic informations ( www.bis.org )

Harmonizing to the Figure 3.1 above and the Table 3.3 we can see that from 1994 to 2003, RMB existent effectual exchange rate had a overall upward tendency, lifting from 82.6 in 1994 to 100.0 in 2005. In the past few old ages, RMB exchange rate has happened four times comparatively more significant alterations.

The First Time Change: In 1994 RMB exchange rate foremost unified, the official nominal exchange rate is set at around 8.6 Yuan RMB/Dollar, compared with the 5.76 in 1993, RMB depreciated really significantly. But in fact, the RMB existent effectual exchange rate appreciated in 1994 really. The grounds why the RMB nominal exchange rate depreciated are because on the one manus, the RMB existent effectual exchange rate has appeared a really important diminution in the foreign exchange barter market in 1993, On the other manus, the rising prices plexus in 1994 was besides really high. So the two chief grounds made the RMB existent effectual exchange rate look a certain degree of reound and grasp. But at this clip, although the RMB existent exchange rate appreciated but China ‘s trade balance of payments tuned from trade shortage to merchandise excess. Trade exports besides had a significant addition. The grounds can be summarized as follow:

The first ground is because of the fusion of RMB exchange rate, this improved the transparence of RMB exchange rate policy and enhanced the assurance of most endeavors sing the stableness of the RMB exchange rate.

The 2nd ground is because the gradual improved export revenue enhancement refund discriminatory policies, this can greatly cut down the export cost of the endeavors.

The Second Time Change: After the Asiatic fiscal crisis in 1997, the Chinese authorities promised that they would non devalue the RMB nominal exchange rate. So as the currencies of neighbouring states and parts had depreciated aggressively, the concluding consequence led to the rapid grasp of RMB existent effectual exchange rate. At this clip, the stimulation consequence of the important grasp of RMB existent effectual exchange rate to the import and export has been offset by the rapid diminution of the domestic economic system and the decrease of the import demand caused because of the RMB exchange rate grasp. So the growing rate for both export and import has declined in 1998.

The Third Time Change: From the terminal of the 1998 to 1999, the economic system of the adjacent states began to retrieve, the monetary value degree in China had a farther diminution and RMB existent effectual exchange rate has appeared a certain degree of devaluation. From 1999 to 2000, China ‘s growing rate of export continuously increased, but the trade balance of payment was non improved yet because of the faster growing rate of the import.

The Fourth Time Change: From the beginning of 2002 to July 2005, because of the impact of the U.S. Economic downswing and the failing of the U.S. Dollar, RMB existent effectual exchange rate has appeared a somewhat depreciation, import and export trade appeared a rapid growing, the trade balance of payment has been improved and the trade excess had a farther enlargement.

Table 3.3 1994-2011 The alterations of RMB exchange rate and import and export growing rate comparing

Year

Change of RMB Nominal

Exchange Rate ( % )

RMB Real Effective Exchange

Rate Index

Export Growth

Rate ( % )

Import Growth

Rate ( % )

1994

49.58

82.6

31.9

11.2

1995

-3.11

92.1

23.0

14.3

1996

-0.44

101.2

1.5

5.1

1997

-0.29

108.9

21.0

2.6

1998

-0.13

114.7

0.5

-1.5

1999

-0.01

108.5

6.1

18.2

2000

0.0

108.5

27.8

35.8

2001

-0.02

113.2

6.8

8.2

2002

0.00

110.6

22.4

21.2

2003

0.00

103.3

34.6

39.8

2004

0.00

100.5

35.4

36.0

2005

-1.03

100.0

28.4

18.0

2006

-4.77

101.6

27.2

20.0

2007

-2.49

105.6

25.7

20.7

2008

-7.66

115.3

17.3

18.5

2009

-1.67

119.2

-15.9

-11.3

2010

0.90

118.7

31.3

38.7

2011

-4.59

121.9

20.3

25.0

Beginning: The BIS ( www.bis.org ) and the National Bureau of Statistics of China web sites ( www.stats.gov.cn )

The RMB exchange rate motion and import and export trade state of affairss after the latest unit of ammunition of RMB exchange rate reform in July 21 2005.

Since the RMB exchange rate mechanism reform in 2005, the alteration tendency of China ‘s import and export trade volume can be shown as follow ( see figure 3.2 ) . From July 2005 to the terminal of the 2011, although the RMB existent effectual exchange rate has risen from 100.0 to 121.9, but this has non affected the export fight of Chinese goods. The chief ground is because of the gradual improved fight of Chinese export goods. In add-on, the replaceability of Chinese export goods has declined continuously, so China ‘s trade balance of payment has ever kept a excess since 2005. We can see from the figure 3.2 that China ‘s import and export trade volume has ever maintained a really good growing tendency and the import and export trade volume has increased significantly.

So RMB exchange rate grasp will non hold a really large impact on China ‘s import and export trade as a whole, although there will still hold a certain extent of impact in the short term, but the inauspicious impact of the RMB grasp will be bit by bit reduced with the clip goes by.

Figure 3.2 2005-2011 China ‘s import and export entire volume alteration tendencies

Beginning: The Statistical Yearbook of China from the National Bureau of Statistics of China web site.

Note: The unit of the informations are in one hundred million U.S. Dollar

3.3.2 The RMB exchange rate alterations and foreign direct investing

If we observe the inclination of RMB exchange rate motion, we can happen out that RMB exchange rate alterations will besides hold a certain impact on the foreign direct investing. Next, allow ‘s reexamine the relation between RMB exchange rate motion and FDI. It can be divided into two periods.

The First Time period: RMB exchange rate motions and FDI conditions from 1994 to 2005

After the fusion of RMB official exchange rate and the market exchange rate in 1994, RMB nominal exchange rate has appreciated significantly. We can see the tabular array 5.4 below, RMB nominal exchange rate depreciated against U.S Dollar from one U.S. Dollar to 5.76 kwai to one U.S. Dollar to 8.62 kwais, so, FDI soared from $ 27.5 billion in 1993 to $ 33.715 billion in 1994. After 1994, on the one manus, due to RMB exchange rate has kept at a comparatively really stable degree, on the other manus, China has strengthened foreign investing supervising direction which has restricted some foreign direct investings that do non follow with China ‘s industrial policys and China is no longer merely prosecuting the measure of the FDI.

Therefore, from 1994 to before the Asiatic fiscal crisis, the growing rate of FDI influx is comparatively stable in China. With the eruption of the 1997 Southeast Asia fiscal crisis, due to take a firm standing on non devaluing the RMB exchange rate, this led to the important grasp of RMB exchange rate compared with other Southeast Asiatic states and it obviouly has had an really inauspicious and bad impact on the FDI that has flowed into China. We can see from the tabular array 3.4 that RMB existent effectual exchange rate has risen from 101.2 in 1996 to 114.7 in 1998, at the same clip, The FDI growing rate has declined aggressively from 11.21 % in 1996 to 0.46 % in 1998. After that, as the comparatively betterment of the economic system of the adjacent states from 2000 to 2002. China ‘s FDI has steadily recovered once more. In 2003, the grounds for the crisp diminution in FDI growing rate is due to the eruption of the SARS epidemic in China, so this has brought about a certain extent of impact and daze on FDI in China.

Table 3.4 1994-2011 The FDI growing rate and the alteration of RMB exchange rate

Year

RMB Nominal Exchange

Rate ( Average )

Change of Nominal

Exchange Rate ( % )

RMB Real Effective

Exchange Rate

FDI Total Volume ( One Hundred

Million U.S. Dollar )

FDI Growth

Rate ( % )

1994

8.6187

49.58

82.6

337.1

22.53

1995

8.351

-3.11

92.1

375.2

11.29

1996

8.3142

-0.44

101.2

417.3

11.21

1997

8.2898

-0.29

108.9

452.6

8.46

1998

8.2791

-0.13

114.7

454.6

0.46

1999

8.2783

-0.01

108.5

403.2

-11.31

2000

8.2784

0.00

108.5

407.2

0.98

2001

8.2770

-0.02

113.2

468.8

15.14

2002

8.2770

0.00

110.6

527.4

12.51

2003

8.2770

0.00

103.3

535.1

1.44

2004

8.2768

0.00

100.5

606.3

13.32

2005

8.1917

-1.03

100

603.3

-0.5

2006

7.9718

-4.77

101.6

630.2

4.47

2007

7.6040

-2.49

105.6

747.7

18.64

2008

6.9451

-7.66

115.3

924.0

23.57

2009

6.8310

-1.67

119.2

900.3

-2.56

2010

6.7695

0.90

118.7

1057.4

14.86

2011

6.4588

-4.59

121.9

1160.1

9.72

Beginning: The bank for international colonies ( BIS ) , the National Bureau of Statistics of China web sites and the Ministry of Commerce of the People ‘s Republic of China web site.

The Second Time period: RMB exchange rate motions and FDI conditions after the latest unit of ammunition of RMB exchange rate reform in July 21 2005 ( From July 2005 to the terminal of 2011 )

We can see from the Table 5.4 that although since RMB exchange rate reform in 2005, the entire sum of the FDI that China has used has been continuously expanded. But compared with 2002 to 2004 twelvemonth, the growing rate of the FDI that China has used in both 2005 and 2006 old ages has decreased significantly. In 2006, due to the extra liquidness of several chief developed states in the universe, this led to the one time once more rapid development of the international direct investing. However, The FDI status in China was non really optimistic yet, the existent use of foreign capital grew by merely 4.47 % in 2006.

In add-on, in 2007 and 2008, the growing rate of FDI in China has been improved significantly, it is because that the attack of 2008 Beijing Olympic Games has farther promoted foreign direct investing and the growing rate reached 23.57 % in 2008. However, in 2009, the growing rate of FDI in China one time once more went down significantly and reached -2.56 % . The ground is because of the eruption of the fiscal crisis in 2009, this led to many transnational companies confronting a deficit of financess which eventually caused a certain extent of daze to the FDI in China. Meanwhile, because of the thorough eruption of the European debt crisis in 2010, this has brought about a certain extent of daze to the FDI in China, so that ‘s why the growing rate of FDI has bit by bit declined since 2010.

Although the current overall tendency in the usage of FDI in China still has non had really important fluctuations, but the diminution of the attraction to the FDI because of the grasp of RMB has been reflected by the lag of the growing rate of the FDI that China has used.

Harmonizing to the analysis based on a combination of the bing theoretical research and empirical informations, the impact of RMB exchange rate motions on China ‘s FDI can be summarized as the undermentioned several points:

First, RMB exchange rate depreciation will advance the FDI influx in the short term, but if we focus on the long term, we can see RMB exchange rate depreciation will still hold a certain extent of daze to the FDI in the long term because the fluctuations of RMB existent exchange rate will impact the investing assurance of the FDI.

Second, the short-run fluctuations of the RMB exchange rate will non hold a really important impact on the FDI, but if we focus on the long term, the long-run and uninterrupted depreciation of RMB exchange rate can advance the influxs of the FDI.

So in a word, the grasp of RMB existent effectual exchange rate will hold a certain negative impact on the influx of FDI in a certain period of clip, but with the gradual accommodation of the RMB exchange rate, RMB exchange rate will eventually be given towards stableness and the market outlooks towards the