Real Effect of Exchange Rate in RMB and Trade Surplus in China

Transcription

1 Canaian Social Science Vol.3 No.5 October 2007 Real Eect o Exchange Rate in RMB an Trae Surplus in China EFFET RÉEL DU TAUX DE CHANGE SUR RMB ET SURPLUS COMMERCIAL EN CHINE Wang Zhe 1 Abstract: The relationship between real eective exchange rate (REER) o RMB rom 1997 to 2006 an trae surplus between China an other trae partners was iscusse using cointegration vector autoregression in the paper. The stuy shows that there exists a long-staning an stable relationship between REER o RMB an trae balance; the all o the real eective exchange rate o RMB is one o the reasons o the increasing trae surplus, however, the inluences it brings are less than omestic GDP an trae partner s GDP o. So, increasing the lexibility o the exchange rate o RMB, broaening the exchange rate s loat space between RMB an ollar are a necessary part o the package policies in solving the trae surplus. Key wors: RMB appreciation, real eective exchange rate, trae surplus, cointegration vector autoregression Résumé: La relation entre le taux e change réel (TCR) e RMB e 1997 à 2006 et le surplus commercial e la Chine avec les autres partenaires commerciaux est iscutée, en utilisant l autoregression e vecteur e cointegration, ans l article présent. L étue montre qu il existe un lien stable e longue ate entre TCR e RMB et la balance commerciale, et que la baisse e TCR e RMB est une es raisons u surplus commercial croissant. Néanmoins, ses inluences sont moins importantes que celles e PIB e notre pays et es partenaires. Ainsi, renorcer la lexibilité u taux e change e RMB, élargir l espace e lottement u taux e change entre RMB et le ollar sont nécessaire pour résoure le problème e surplus commercial. Mots-Clés: appréciation e RMB, taux e change réel, surplus commercial, autoregression e vecteur e cointegration Exchange rate (REER) o RMB shows a stable appreciation tren rom 2005 when it began to reorm. At the same time, trae surplus an oreign exchange reserve showe all-time upswing continually. The issue o exchange rate o RMB is a ocus or USA up to the present. A new bill rate out by Democrat conscript athers Chars, which wante RMB to appreciate aster. In 2007, trae surplus in the irst quarter were 464 hunre million ollar that were 231 hunre million ollar more than in same term in China, so big inancial, organizations in the worl consiere that the tren will bring RMB appreciation more pressure. At the same time, center bank inicate that one o the work pivots is to enhance the lexibility o RMB, an to keep the exchange stable in a reasonable level. Zhou XiaoChuang, the presient o People's Bank o China, thought that China will expan the lexibility o RMB accoring to go-aheaism, graualness, an controllable principle, an the exchange rate will be etermine via supply an eman in the market. It is obvious that the market hols an important position more an more in case o creation o mechanism o RMB exchange rate; with the continual increment o oreign exchange reserve the pressure o RMB appreciation will keep. Whether RMB appreciation can settle trae surplus is the stuy subject in the paper, the long-term an short-term relationship between real eective exchange rate (REER) o RMB an trae surplus was investigate, an the eect an tren o RMB appreciation was appraise. 1. REFERENCE REVIEW 1 School o economics, Huazhong University o science an technology, China. * Receive 11 August 2007; accepte 24 September

2 Wang Zhe/Canaian Social Science Vol.3 No Traitional income-expenses theories think, when M-L conition is mete, it is that the sum between the eman elasticity o importe commoity an that o exporte commoity is more than one, the money appreciation will bring the change o the relative price, which will lea to change o the quantity o the importe commoity, ultimately, it will bring the income an expenses o trae to change. At the same time, owing to the J curve eect in real economy, in initially, exchange rate appreciation can change the income an expenses o trae ue to the hysteresis o exchange rate transer; ater a while, the income an expenses o trae will become eteriorate graually. Many scholars in the worl analyze instructively the relationship between the trae surplus an exchange rate in China. Xie J G an Chen L G (2002) oun that epreciation o exchange rate o RMB rom 1978 to 2000 i not bring the income an expenses o trae remarkable inluence in China; at the same time, they also thought that the rate policies will not work i the change o the income an expenses o trae is brought by other actors. Zhang S G (2005) measure the FDI unction in China, the unction o import an export, an the lexibly o exchange rate; an he also estimate the cost o exchange rate appreciation with ierent level, which mainly inclue the amount o oreign capital an the ecrease o export trae, an the GDP an ecreasing employment scale they brought. The author also oun that exchange rate appreciation will bring the amount o import an export prominent eect, which will ecrease more than a hal ater three quarters, an almost isappear ater seven quarters. Lu X Q an Dai G Q (2005) teste the long-term relationship between luctuations o weighte real exchange rate o RMB to main currency in the worl an the import an export rom 1994 to 2003 in China using cointegration vector autoregression technique, the result inicate that the luctuations will bring the import an export trae remarkable eect when the M-L conition was met with the working J curve eect. At the same time, many scholars investigate the relationship between trae eicit between China an USA an exchange rate o RMB. Chou (2000) analyze the relationship, an oun that the luctuation o real exchange rate o RMB to ollar will bring the export to USA in China a negative eect; it is that the export will ecrease when the luctuation is rastic. However, only the luctuation o exchange rate was analyze in the paper, the eect the real exchange rate an nominal exchange rate bring China-USA trae structure i not be iscusse. Yao Z Z (2003) thought that exchange rate is not only actor that eects trae eicit in USA, inancial eicit policies, the large-scale securities capital inlux cause by the status o ollar consiere as an international settlements currency an a reserve currency, are the important causes brought large-scale trae eicit. As a result, only epening on change o exchange rate, the problem o trae surplus in USA cannot be settle. Eckaus (2004) thought that the unbalance trae in the two countries inicate uncertainly that exchange rate is not in a problem, only emphasizing the trae an exchange rate in China is not right. Li an Li s (2006) result obtaine by analyzing the l ata o China-USA trae rom showe that there is not any prominent relationship in statistics between the luctuation o nominal exchange an practical exchange o RMB to ollar an the luctuation o export o China to USA, an that o China importe commoity rom USA, by contraries, a remarkable actor in statistics that eect the amount o exporting USA is the rate that FDI hols in Chinese economy. So, the conclusions are that the scholars obtaine must not be the same because o the selecte methos, economy variables, an the chose samples. At present, most o reerences think that there exist not cointegration relationship between real eective exchange rate o RMB an income an expenses o trae; only ew reerences amitte that there exists the relationship, an exchange rate is an important actor that aects income an expenses o trae. So, in the paper, the cointegration test o real eective exchange rate o RMB an income an expenses o trae was achieve by analyzing the ata rom 1997 to 2006, an then the VAR moel was establishe to relect the level o short-term luctuation eviates long-term equilibrium; inally, the change o trae surplus shocke by exchange rate impact brings was explaine using covariance ecomposition technique. 2. SELECTION OF MODEL AND DATA 2.1 Moel Traitional methos assume that import eman is a unction o omestic GDP Y, price o import commoity P m (the price is enote by oreign currency), the price o omestic commoity P, exchange rate S?an so on: M = M ( Y, P, P, S) (1) m Export eman X is a unction o some variables such as income level in trae partnersy, the omestic price o export commoity P x, price o commoity in trae partners P, exchange rate S an so on: X X ( Y, P, P, S) = (2) x Presuming the real exchange rate is: E = SP / P = SP / P (3) m x 92

3 Wang Zhe/Canaian Social Science Vol.3 No So, we can rewrite the above expression: M M ( Y, E) = (4) X = X ( Y, E) (5) TB X M Deining the rate trae surplus = / yiels: = (,, ) (6) TB TB E Y Y Logarithm o the above ormula, an o linear estimation yiel the ollowing equation: ln( TB ) = C + C ln( E ) + C ln( Y ) + C ln( Y ) + e (7) t 0 1 t 2 t 3 t 1 2. SELECTION OF DATA In the paper, the selecte ata is a quarter ata rom 1997 to 2006, where: (1) REER: the inex o REER o RMB base on 1996 was chosen or the analysis. In a multi-currency international economy system, the NEER can be estimate in orer to observe the total state o some currency an it hols station in international trae an competition o inance iel, which can be obtaine by weighting nominal bilateral exchange rate between the estimate country an some sample countries; in act, the REER is obtaine by eliminating the eect o price inex rom NEER. (2) Domestic real income ( Y ): the GDP inex base on 1996 in China is selecte or the analysis. (3) Real income o trae partners ( Y ): the real GDP inex in the countries that there is a close trae relation with China is selecte, which were obtaine by weight accoring to the trae proportion. Except the countries, Hong Kong SAR, Japan, USA, Korea, which have the most amount o trae with China, we also chose the GDP inex o iteen countries in EU with an increasing amount o trae with China; total amount o trae between the countries an China hols 80% o export amount in China. All above GDP inex real GDP base on (4) Income an expense o trae (ln( TB ) ): it is a logarithm o the rate between the amount o import an that o export among China an trae partners each quarter in the selecte sample term. In the above inex, the omestic real income ata was obtaine by computing accoring to statistics quarter report o People's Bank o China. Trae surplus ata was obtaine by computing accoring to the statistics rom the web o ministry o commerce o the people s republic o China; the ata o real income in trae partners an that o REER o RMB were rom EIU calculation atabase. 3. TEST AND ANALYSIS OF RESULT 3.1 Stationarity test o time series A basic conition to analysis o time series is that the consiere sample must be a stationary unit root process, or it can lea to spurious-regression phenomenon. In the paper, we employe ADF metho to test unit root, the optimal lag orer o unit root was establishe via AIC criterion; the lag orer is better when the AIC is smaller. The result o ADF test was showe in table 1. Analyzing the table, it is obvious that every time series is non-stationary, but one orer ierence o the ata is stationary statistically signiicant at 5% level, it is that every variable is a I(1) process. So we can aopt cointegration theory to analyze the ata. 93

4 Wang Zhe/Canaian Social Science Vol.3 No Test o cointegration relationship For the time series with the same unit root, we can employ Johansen test to iscriminate whether exists a cointegration relationship among the teste ata. The basic principle o Johansen is that vector autoregression moel, which inclues the one orer ierence lag item o the involve variables an one orer lag item o horizontal quantity, is estimate using maximum likelihoo estimation, at the same time, the eigenvalue o level estimation coeicient matrix is solve. Accoring to Johansen s proposition (1988), we can iscriminate whether there exist a cointegration relationship among the consiere ata by the maximum statistics - Tln (1 - λ), viz. λ max, an trace statistics - T Σln (1 - λ), namely, λ trace. Osterwal-Lenium (1992) propose the critical value o the two statistics corresponing to ierent error moiication moel. Given null hypothesis o there exists not a cointegration relationship among the moel variables, when the estimation value o the statistics excees the critical value; we reuse the null hypothesis an accept the alternative hypothesis. The rank number the eigenvalue correspons is cointegration orer among the variables (Qing D, 1998). Because the consiere time series is a I(1) process, we can o cointegration test by the logarithm o the rate o export to import between China an other trae partners (TB ), the REER, the omestic income ( Y ), an oreign income( Y ). We can ensure whether there is one or several cointegration relationship among the our variables on the basis o analyzing AIC an SBS criterion,. Table 2 shows that there only is a cointegration relationship among the variables statistically signiicant at 5% level. We can express the cointegration relationship into the ollowing moel: Formula (8) showe the long-term equilibrium relationship between trae surplus an the variables. The ata in parentheses are asymptotic stanar eviation o cointegration coeicient estimation value. When the REER o RMB increases by 1%, the trae eicit will ecrease by 0.29%. When the GDP increases by 1% in trae partners, trae surplus will ecrease by 0.84%. The above relationship showe that among the actors aect the trae surplus such as REER o RMB, GDP in trae partners, an the level o omestic income, the role o omestic GDP is the most important, in turn, are GDP in trae partners an REER o RMB. 3.3 Vector error moiication moel Engle an Granger avise vector error moiication moel by combining cointegration theory an error moiication moel. Gao T M (2006) thought that the moel coul be euce i there is a cointegration relationship in two variables. The moel can irectly escribe the synthetical relationship between the short-term luctuation an long-term equilibrium. Accoring to the above cointegration test, we can obtain the error moiication item. ecm t =lntbt lnreert lny t lnY t So, we can obtain the ollowing VEC moel: Δ lntb= ecm Δ lntb(-1) LNTB(-2) LNREER(-1) LNYF(-2) LNYD (-1) LNYD (-2) (9) In equation (9), the t-statistics o ierent coeicient are: , , , , , , , respectively. 2 Besies, R = ,e= The values o logarithm maximum like, AIC, SC respectively are , , Bigger maximum like value, smaller AIC an SC 94

5 Wang Zhe/Canaian Social Science Vol.3 No value inicate that the result is relatively perect. From the result o regression, we can in that change o trae surplus will be inluence remarkably by the short-term change o real income with a 5% level in trae partners; the short-term change o REER o RMB with an above 5 percent o level will also bring the surplus remarkable inluence. 3.4 Covariance ecomposition Covariance ecomposition metho can be employe to investigate the ynamic characteristic o the moel consiering the VAR moel. Primary iea o the metho is that the luctuation o enogenous variable in the system was ecompose into m components that associate with new inormation in ierent equations accoring to the cause, so we can unerstan the relative importance o the variables the new inormation brings (Yi D H, 2002). In the paper, covariance ecomposition was implemente to ater 20 terms. From table 3, we can in, in mile-term, the inluence REER o RMB bring income an expenses o trae will graually increase by 40% or so, however, the inluence that long-term REER o RMB bring income an expenses o trae will be more than that o short-term REER o RMB. 4. CONCLUSIONS We can obtain the ollowing conclusions by analyzing the cointegration relationship between income an expenses o trae an REER. (1) There exists a long-term stable relationship between income an expenses o trae an REER accoring to the result o the test. The luctuation o REER o RMB will bring the income an expense o trae istinct change, but the eect it bring will is smaller than that o the level o income at home, an real income level in trae participator countries. (2) The result o error moiication moel shows that the luctuation o REER will leas to istinct change o income an expense o trae in the short-term. (3) The result o covariance ecomposition inicates that the eect REER o RMB brings income an expense o trae is a graual augment process in the mile-term. The rank o actors that inluence income an 95

6 Wang Zhe/Canaian Social Science Vol.3 No expense o trae is the level o income at home, real income level in eal participator countries, an REER o RMB accoring to their importance. The level o REER in RMB is one o important actor to inluence income an expense o trae, however, the orce is smaller than the other two actors. We shoul rightly look on the unction o exchange rate work on settling the trae eicit, RMB appreciation is a necessary component in package policy o settling the trae surplus. Moiying exchange rate policy in China can alleviate the unbalance trae. Uner the backgroun o economic globalization, bilateral trae balance mainly epens on economy structure an the ivision o work pattern o the worl, though the change o exchange rate can aect trae balance. As a result, the answer cannot only be epening on the change o exchange rate, but it also cannot be avoie. Expening omestic eman an importing are eicient measures to moiy international trae surplus, at the same time, the exchange rate policies that consiere as an accessorial measure will work on some egree (Zhou X C, 2007). As or trae surplus, the eect REER o RMB brings is more irect than that o nominal exchange rate oes. Though RMB to ollar is appreciate in 2006, in whole, REER ecrease in China. In 2006, the appreciation o RMB to ollar is by 3% or so, but the money such as EUR to ollar or KRW to ollar is appreciate more than YUAN. The cause o ecrease o REER o RMB when the exchange rate o RMB to ollar arrives a summit is that the ollar is in a large epreciation in the worl, the range o RMB appreciation lag the appreciation o other currencies to ollar, in act, which lea to epreciation o RMB. The cause that trae unbalance i not be meliorate by the appreciation o RMB to ollar can be interprete using REER. With the ecrease o trae surplus graually rom 2006, in the year, the summation o trae surplus is hunre million ollar, which is over 700 hunre million ollar more than 2005 with 1019 hunre million ollar, the range o augment is by 74.0%.In the en,rmb has still in the pressure o appreciation. There is an avantage an isavantage to the change o RMB; when the value o RMB is unerestimate, the avantage o the labor-intensive inustry will be expene, an however, it is isavantageous or the avance technology inustry to enhance their international competition power. On the opposite, the price o RMB will ecrease with the increase o the import commoity, which can lea to the omestic commoity price ecrease that will eteriorate elation (Wang Z X, 2004). Rapi appreciation o RMB can bring more risk an instability to economy; similarly, we also will bear more cost i the spee o RMB appreciation is slow, in the long run, which is a isavantageous to trae an economy stability. As what Lrens sai, i the elapse time o exchange regulation in China is longer, the cost will be higher. Slow regulation spee o exchange rate will bring the markets hien troubles. At the same time, extremely cautious policies o the reorm o RMB exchange rate will osterage oreign protectionism, in the long run, which will be a isavantage or export an maintaining the trae relationship between China an trae participator countries. The reorm o exchange rate generation mechanism, especially more lexibility in exchange rate o RMB, bigger exchange rate loat space o RMB to ollar are more important than whether RMB will appreciate or not. We shoul give RMB more lexibility, exert the market mechanism on the orm o RMB exchange rate, an let oreign exchange market seek the equilibrium level o RMB exchange rate spontaneously. At the same time, control o gamble capital is an important saeguar measure that accors with moiication o the policy o RMB exchange rate, which can eiciently prevent the hot money rom inputting market so as to give moiication o RMB a looser circumstance. REFERENCES Chou, W. L.. Exchange Rate Variability an China's Exports. Journal o Comparative Economics, 2000, 28(1): Gao Tiemei. Econometric an analysis an moel. Beijing: TsingHua University Press, Lu Xiangqian, Dai Guoqiang. The inluence o luctuation o REER o RMB on China s export an import: Economy stuies, 2005:(5). Li Daokui, Li Danning. Trae surplus between China an Unite states: what is the root cause? International economic review, 2000(9-10). Qin Duo. Dynamic econometrics. Shanghai:Shanghai people press,1998. Wilson P.Exchange rate an the Trae Balance or Dynamic Asian Economies Does the J2curve Exit or Singapore,Malaysia an Korea. Open Economies Reviews, 2001,(12): Zhangshuguang. RMB exchange rate: appreciation an the cost-win analyses. Economy stuies, 2005,(5). THE AUTHOR Wang Zhe, School o economics, Huazhong University o science an technology, Wuhan, , China. lucky9191@tom.com 96