This thesis examines China's exchange rate and its relationship with China's foreign trade in the reform period from the late 1970s to the present. China's foreign exchange management system has undergone major changes in the past two decades. The exchange rate regime has evolved from a fixed (but adjustable) rate, to a dual exchange rate system in the 1980s and early 1990s, and to a managed floating rate in the mid 1990s. The official exchange rate was devalued substantially from 1980 to 1994. Since1995, the official exchange rate has been de facto pegged to the US dollar. Although the nominal exchange rate is subject to central bank intervention in the foreign exchange market, the government claims that China’s currency, the Renminbi, achieved current account convertibility at the end of 1996. / The parallel exchange rates were an internal settlement rate adopted in the 1981-1984 period and a swap market rate in the 1987-199:3 period. The internal settlement rate was based on the cost of foreign exchange earnings and it was constant over the period. The swap market rate was semi-market-determined in foreign exchange swap markets in which foreign exchange retention quotas were traded. Since the official exchange rate and the interest rate were rigorously controlled by China's authorities, it is not surprising that purchasing power parity and interest rate parity do not hold for this period. However, it is found that the swap market premium over the official exchange rate is closely related to the inflation differential between China and the United States. / Trade liberalisation accompanied by currency devaluation has been one of key elements of the successful experience of the Chinese economy. This thesis calculates a new and improved series for the real effective exchange rate in order to estimate the effects of exchange rate changes on foreign trade. By estimating real export and import equations, it is found that changes in the real exchange rate did affect the volumes of foreign trade, and that a real devaluation would promote exports and restrain imports, thus improving the trade balance. / China has a strongly dualistic trade regime, and because of this characteristic the total trade account is disaggregated into processing and other trade. Processing trade is the trade of export processing when imported intermediate inputs are processed in China and then the finished goods are exported. A model of fragmentation with multistage production is set up to analyse the relationship between exchange rate changes and the volume of processing trade. The model shows that a devaluation of the domestic currency would likely increase China's processed exports and domestic employment. The empirical evidence is consistent with the findings from the theoretical model. / The thesis then goes on to examine China's exchange rate mechanism. Official documents and statements clearly indicate that export promotional was a major objective of the authorities in adjusting the exchange rate and that price stability was also a key factor in determining the level of the official exchange rate, particularly after the late 1980s. The results from estimating policy reaction functions suggest that the authorities did adjust the exchange rate in response to changes in trade performance and prices (or the rate of inflation). A worsening trade account would prompt the authorities to devalue the currency while rising inflation would slow the pace of devaluation. / The findings from this thesis imply that the current policy of a nominal exchange rate pegging to the US dollar and related restrictions on foreign exchange and imports will not assist further liberalisation of foreign trade, which is necessary to sustain China’s economic growth. With the accession to the World Trade Organisation in the near future, an exchange rate policy consistent with the reduction of trade restrictions is an urgent need for the Chinese economy.
| Identifer | oai:union.ndltd.org:ADTP/275863 |
| Date | January 2001 |
| Creators | Song, Lei Lei |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
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