There are many factors that affect exchange rate changes in economic activities, which are listed as follows:
I. Balance of payments. The balance of payments is the dominant factor that determines the exchange rate trend. The balance of payments is the sum of various payments in a country's foreign economic activities. Generally speaking, the balance of payments deficit indicates a shortage of foreign exchange. Under the floating exchange rate system, market supply and demand determine the change of exchange rate, so the balance of payments deficit will cause the local currency to depreciate and the foreign currency to appreciate, that is, the foreign exchange rate will rise. On the contrary, the balance of payments surplus leads to the decline of foreign exchange rate. It should be noted that under normal circumstances, changes in the balance of payments determine the long-term trend of the exchange rate.
Second, national income. Generally speaking, the increase of national income leads to the increase of consumption level, and the demand for local currency also increases accordingly. If the money supply remains unchanged, the extra demand for local currency will increase the value of local currency and cause the depreciation of foreign exchange. Of course, whether the exchange rate will fall or rise due to changes in national income depends on the reasons for the changes in national income. If the national income is increased by increasing the supply of goods, the purchasing power of the country's currency will be strengthened and the foreign exchange rate will decline for a long time. If the national income is increased by expanding government expenditure or total demand, the excess demand must be met by expanding imports under the condition of constant supply, which will increase the foreign exchange demand and the foreign exchange rate will rise.
Third, the level of inflation. The level of inflation rate is the basis of influencing exchange rate changes. If a country issues too much money and the amount of money in circulation exceeds the actual demand in the process of commodity circulation, it will cause inflation. Inflation reduces the purchasing power of a country's currency at home and devalues it at home. Other things being equal, the domestic devaluation of the currency will inevitably lead to the external devaluation. Because the exchange rate is a comparison of the currencies of two countries, the value represented by the unit currency of a country with too much currency is reduced, so when the currency of that country is converted into foreign currency, it needs to pay more money than the original national currency.
The change of inflation rate will change people's demand for currency transactions and their expectations of bond yields and foreign currency values. Inflation leads to the rise of domestic prices. Under the condition that the exchange rate remains unchanged, exports lose money and imports are favorable. In the foreign exchange market, the demand for foreign currency increases and the demand for domestic currency decreases, which leads to the rise of foreign exchange rate and the depreciation of domestic currency. On the contrary, if a country's inflation rate decreases, the foreign exchange rate will generally decrease.
Fourth, the money supply The money supply is the primary factor that determines the value and purchasing power of money. If the domestic money supply decreases, the local currency is more valuable because of scarcity. Usually, the reduction of money supply goes hand in hand with the tightening of money supply and credit, which leads to the decline of total demand, output and employment, the decline of commodity prices, the rise of local currency value and the corresponding decline of foreign exchange rate. If the money supply increases, the surplus money will show up in the form of inflation, domestic commodity prices will rise and purchasing power will decline, thus promoting the import of relatively cheap foreign goods in large quantities and the foreign exchange rate will rise.
Verb (abbreviation of verb) financial revenue and expenditure A country's financial revenue and expenditure has a great influence on the balance of payments. The expansion of fiscal deficit will increase aggregate demand, which will often lead to balance of payments deficit and inflation. As a result, the purchasing power of local currency declines and the demand for foreign exchange increases, which in turn pushes the exchange rate up. Of course, if the fiscal deficit expands, monetary policy, supplemented by measures to strictly control the amount of money and raise interest rates, will attract foreign capital inflows, make the local currency appreciate and the foreign exchange rate fall.
Interest rate of intransitive verbs
Interest rate has a great influence on short-term exchange rate under certain conditions. The influence of interest rate on exchange rate is the flow of funds, especially short-term funds, caused by the difference of interest rates in different countries. Under normal circumstances, if the interest rate difference between the two countries is greater than the forward and spot exchange rate difference between the two countries, funds will flow from countries with lower interest rates to countries with higher interest rates, which is conducive to the balance of payments of countries with higher interest rates. It should be noted that although the interest rate level has a certain impact on the exchange rate, its role is limited from the basic factors that determine the fluctuation trend of the exchange rate. It only temporarily affects exchange rate changes under certain conditions.
Seven. Exchange rate policies and market intervention in various countries
The exchange rate policies of various countries and their intervention in the market affect the exchange rate changes to some extent. Under the floating exchange rate system, central banks of all countries are trying their best to coordinate their monetary policies and exchange rate policies, trying to support the stability of their own currencies by influencing the supply and demand of the foreign exchange market. The main means by which central banks influence the foreign exchange market are: adjusting their own monetary policies and influencing the exchange rate through interest rate changes; Direct intervention in the foreign exchange market; Implement foreign exchange controls on capital flows.
Eight. Speculation and Market Psychological Expectation
Since 1973 implemented the floating exchange rate system, speculation in the foreign exchange market has intensified. Speculators are often powerful and can add fuel to the fire in the foreign exchange market, so that the exchange rate changes are far from its equilibrium level. Speculators often use the market to attack a certain currency, and the offensive is so strong that it is difficult to prevent central banks from intervening in the foreign exchange market. Excessive speculation intensifies the turmoil in the foreign exchange market, hinders normal foreign exchange transactions and distorts the relationship between foreign exchange supply and demand.
In addition, participants and researchers in the foreign exchange market, including economists, financial experts and technical analysts, as well as fund traders, devote themselves to the study of foreign exchange market trends every day. Their judgment on the market, their influence on the psychology of market traders, and traders' own predictions on the market trend are all important factors affecting the short-term fluctuation of exchange rate. When the market expects a currency to fall, traders will sell a lot of the currency, which will lead to a decline in the exchange rate of the currency; On the contrary, when people expect a certain currency to become stronger, they will buy it in large quantities, thus making its exchange rate rise. Because the public expectation is speculative and decentralized, it intensifies the oscillation of short-term exchange rate fluctuations.
Nine. Political and unexpected factors
Because capital pursues safety first, political and unexpected factors have a direct and rapid impact on the foreign exchange market, including political stability, policy continuity, government's foreign policy, war, economic sanctions and natural disasters. In addition, the general elections in western countries will also have an impact on the foreign exchange market. Politics and emergencies, because of their suddenness and timeliness, make the market unpredictable, so it is easy to form a shock wave to the market. Once the market reacts to the news and digests it, the influence of the original news will be greatly weakened.
In a word, there are many factors that affect the exchange rate, and the relationship between these factors is complicated. Sometimes these factors work at the same time, sometimes individual factors work, and sometimes even cancel each other out. Sometimes this factor plays a major role and another factor plays a minor role. However, for a long time, the law of exchange rate changes has been restricted by the balance of payments and inflation, so it is the basic factor that determines the exchange rate changes. Interest rate factors and exchange rate policies can only play a subordinate role, that is, they can help or weaken the role played by the basic factors. A country's fiscal and monetary policies play a decisive role in exchange rate changes. Under normal circumstances, setting the exchange rate at an appropriate level has become one of the policy objectives of monetary policy in various countries. Usually, the central bank uses three policy tools to implement monetary policy, namely, deposit reserve policy, discount policy and open market policy. Speculation only adds fuel to the fire on the basis of the basic trend of exchange rate determined by other factors.
First, explore the reasons for RMB appreciation.
In recent years, the RMB exchange rate issue has become the focus of attention at home and abroad. After the exchange rate reform on July 2, 2005, China ended the "market-based, single and managed floating exchange rate system" since July 2, 2005, and implemented a more flexible "market-based, managed floating exchange rate system with reference to a basket of currency exchange rates" instead of just pegging to the US dollar. Since then, the RMB has appreciated rapidly against the US dollar at a rate of about 4.3% per year, and the trend is accelerating. By February 2, 2008, the cumulative appreciation reached 1 1.8%.
1. Determination of long-term exchange rate-purchasing power parity theory
The starting point of understanding the exchange rate determination mechanism is a simple concept, that is, law of one price: If the goods produced by the two countries are homogeneous and the transportation costs and transaction barriers are low, then the prices of the goods produced by any country should be the same in the world. Changing a single commodity in law of one price into a domestic price level is purchasing power parity. According to the purchasing power parity theory, the exchange rate changes of any two currencies should reflect the changes in the price levels of the two countries.
2. Short-term and medium-term exchange rate balance
For the short and medium-term exchange rate, this paper thinks that it is determined by the supply and demand of RMB in the market, and various factors in the market affect the supply and demand of RMB, which in turn affects the trend of RMB. The following is an analysis of the pressure of RMB exchange rate appreciation through the supply and demand in the foreign exchange market.
(1) supply side
With the rapid development of China's economy, the export volume has greatly increased, and the amount of foreign investment has remained at a high level. China has the largest net capital inflow after the United States. Due to the double surplus of current account and capital account, China's foreign exchange reserves are growing rapidly. In 2006 10, foreign exchange reserves exceeded 1 trillion dollars, making it the country with the largest foreign exchange reserves in the world, and reached a record10.5 trillion dollars in February 2007. The continuous increase of foreign exchange reserves, on the one hand, enhances China's ability to resist financial risks, on the other hand, excessive foreign exchange reserves also bring great pressure to China's macro-control, which affects the change of RMB exchange rate and increases the pressure of RMB appreciation.
(2) Demand side
International comments on RMB appreciation were first put forward by Japan, the United States and other countries. In February 2003, Masajuro Shiokawa, Japanese Finance Minister, declared at the meeting of finance ministers of seven countries that "Japan's deflation is not only caused by importing too many cheap goods from China, but by the global economic depression". In June and July, US Treasury Secretary Timothy Si Nuo and Federal Reserve Chairman Alan Greenspan expressed the hope that the RMB would be more flexible. Some American hospitals accuse China of exporting a large number of cheap goods to the United States, resulting in a huge trade deficit in the United States, taking away employment opportunities in the United States, increasing the number of unemployed people and causing economic depression. Later, the EU also joined the demand for RMB appreciation. After that, the international financial community became more enthusiastic about RMB exchange rate appreciation, and the substantial increase of China's foreign exchange reserves increased the expectation and pressure of RMB appreciation. Although the China government has stated on various occasions that it wants to maintain the stability of the RMB, it will not appreciate significantly. However, the fact is that the central parity of RMB exchange rate has greatly appreciated since it broke through the 1 USD/8.0: 1 mark in July 2006, and it has shown an accelerating trend, which not only increases the further expectation of RMB appreciation by international hot money, but also inevitably increases the expectation of domestic residents and enterprises, thus leading to a decline in foreign exchange demand.
Two. Costs and benefits of RMB appreciation
1. The cost of RMB appreciation
The possible costs of RMB appreciation are: first, it may reduce exports and international income; Second, it may increase the unemployment rate in China, especially in export enterprises closely related to the RMB exchange rate; Third, it may increase the cost of foreign direct investment, which is not conducive to attracting new foreign direct investment; Fourth, it may trigger the impact of speculative capital on the RMB exchange rate.
From the general economic theory, the above costs do often occur with the appreciation of the currency. Let's talk about whether these costs will happen and how much impact they will have according to the actual situation in China.
(1) RMB appreciation and export
As far as China's trade structure is concerned, the price elasticity of export demand is relatively small, and the adjustment of exchange rate will not bring much change to China's overall export volume. At present, the processing and assembly trade of imported materials and components accounts for about 55% of China's exports, while the processing and assembly trade of imported materials only earns fixed public and miscellaneous fees, which has nothing to do with exchange rate changes. Import processing trade depends on the proportion of imported intermediate products and raw materials. The appreciation of the renminbi and the increase in export prices are not good for some enterprises, but the purchasing power increases and imports can be purchased at lower prices. The net effect of exchange rate changes remains to be seen.
(2) RMB appreciation and employment in China.
According to the data of the National Bureau of Statistics, the registered unemployment rate in China has been above 4% in recent years. Because of the large population in China, the employment problem has always been the focus of social and government attention. The appreciation of RMB will lead to the price increase of export products, which will put great pressure on those enterprises that produce low added value and low efficiency products and mainly rely on foreign trade for export. At present, there are a large number of such small and medium-sized enterprises in China, and the number of employees is very large. If the appreciation of RMB exchange rate increases the export cost of their products, which in turn affects their exports and leads to a sharp rise in the unemployment rate of these enterprises, it will bring great social problems to China, which already has employment problems.
(3) RMB appreciation and foreign direct investment
At present, it is hard to say how much FDI inflow will be reduced by RMB appreciation. Because after entering the mid-1990s, new changes have taken place in the motivation of FDI inflow. More FDI comes from multinational companies in developed countries in Europe and America, and the purpose of investing in China is more inclined to target China's vast market than to take advantage of China's cheap labor costs in the past. As long as the overall macro-economy of China has not changed much, the inflow of FDI should not decrease too much, and it may even increase with the steady and sustainable development of China's economy. Because in today's economic globalization, the channels of capital circulation are more and more smooth, and because of the inherent profit-seeking nature of capital, China, which has a broad market and good development prospects, will be the hunting ground that capital dreams of.
(4) RMB appreciation and speculative capital
In the process of exchange rate adjustment, it may trigger the impact of international hot money, which is a severe test for China, which lacks a perfect financial mechanism at present. Under the strong expectation of RMB appreciation, international investment capital will flow into China through various channels, and then the capital will be taken away after speculating RMB appreciation. Although there is no conclusive evidence that the crazy surge of China real estate market and securities market in recent years is caused by international hot money, there are more and more indications that it is inseparable from them.
2. RMB appreciation gains
The most direct benefit of RMB appreciation is to enhance the purchasing power of RMB. At the same price level, China residents can buy more foreign products, which improves people's living and welfare level to some extent. For enterprises, more raw materials can be imported, which is conducive to reducing production costs. Secondly, the appreciation of RMB will relatively reduce the external liabilities of our government and enterprises, and improve their solvency under other conditions unchanged; Furthermore, proper appreciation is conducive to the adjustment and optimization of China's industrial structure and the upgrading of commodity structure.
Three. Conclusions and policy recommendations
The appreciation of RMB exchange rate has advantages and disadvantages. After weighing the costs and benefits, this paper holds that the appreciation of RMB will gradually bring the nominal exchange rate closer to the actual equilibrium exchange rate, which is beneficial to the long-term economic development of China. But at the same time, we should also see that China's current financial system is not perfect, the ability to resist financial risks is weak, the employment population is huge, and the foreign trade-oriented economy and industrial structure are greatly affected by exchange rate fluctuations, which requires that preventive measures must be taken to deal with possible risks.
1. Expand domestic demand and reduce dependence on foreign trade.
China is highly dependent on foreign trade. According to the data of China Customs, the total import and export volume in 2007 was 2173.83 billion USD. According to the exchange rate of 1 USD against 7.5 yuan RMB, China's dependence on foreign trade was as high as 66% in 2007, and statistics show that the proportion of China's consumption in the total GDP has gradually declined in recent years. The consumption rate of 1992 is 62.4%. In 2007, the total retail sales of social consumer goods in China was 89210 billion yuan, and the consumption rate was only 36%. According to the empirical data since the reform and opening up, China's consumption rate is reasonable in the range of 6 1%-65%. Investment, export and consumption are the three troikas that drive economic development. At present, China's rapid economic development is mainly driven by investment, too dependent on exports, and domestic demand is seriously insufficient. In view of the impact of RMB appreciation on China's foreign trade and the actual situation, China urgently needs to expand domestic demand and increase consumption rate. In this regard, the government should take various measures to increase residents' income, further improve the social security system in medical care, housing and old-age care, and dispel people's worries, so as to effectively release demand and expand consumption, so as not to lead to a sharp decline in exports due to RMB exchange rate fluctuations, which in turn will lead to a large unemployment.
2. Further improve the market mechanism of exchange rate formation and cultivate a relatively balanced exchange rate.
The exchange rate imbalance caused by the long-term deviation between the nominal exchange rate and the real exchange rate is not conducive to the effective allocation of resources and the sound development of the economy. A perfect balanced exchange rate formation mechanism is a fundamental measure to coordinate the balance of payments and a market solution to alleviate the "double surplus". For China, it is unrealistic for the exchange rate to float completely in a short time, but with the gradual expansion of the exchange rate floating range, it is possible to adjust the supply and demand of the foreign exchange market by using the market mechanism and implement a more flexible exchange rate system. At the same time, according to the multi-polarization trend of current international economic development, in the basket of currencies referenced by RMB exchange rate, the dollar component can be appropriately reduced, and the proportion of euro, pound, yen and other currencies can be increased, so as to avoid the risk that the fluctuation of the dollar involves the large fluctuation of China's currency.