1. Analysing the Effects of RMB Appreciation on China’s Economic Growth Stimulation or Deterioration ?

2. I/ INTRODUCTION II/ Overview of China’S Exchange Rate Regime III/Theorectical Framework IV/ Methodology & Empirical Analysis V/ Conclusion

3. Since 1994, the Chinese government has maintained the ”undervalued RMB policy” One of the primary contributions for the fabulous development of Chinese economy

4. However, the undervaluation of RMB now faces fierce critisim from China’s major trade partners, which are : ASEAN EU JAPAN USA

5. “China’s exchange rate needs to strengthen in response to market forces,” (2011) Timothy F. GeithnerTimothy F. Geithner - Former U.S Treasury Secretary “…..We do think that the yuan [also known as the renminbi], is still undervalued.” (2010) Jean-Claude Juncker- Former Chairman of The "Eurogroup"

7. "The main reason for the U.S. trade deficit with China is not the yuan exchange rate, but the structure of trade and investment between the two countries,“ (2010) Hu Jintao - Former President of the People’s Republic of China

8. Contractionary Appreaciation Expansionary Appreciation

9. Contractionary Appreaciation Stiglitz (2005) & Mundell (2006) Zhang (2006) Wei (2006) Ma & Lu (2010) RMB Appreciation 1.Reduced Export 2. Hindering economic growth 3. Slowdown in FDI 4.Increasing Unemployment

10. Expansionary appreciation Krugman & Taylor (1978) Shi (2006) Hsing & Hsieh (2004) Tung & Baker (2004) RMB Appreciation 1. Reduce price level stimulate personal spending & total consumption 2. Reduce costs of imported capital & Stimulate Investment

11. ”Hot Topic””Ambigous answer”

12. 2. How should Chinese government adjust its currency policy according to the effects of RMB appreciation on China’s economic? 1. What are the effects of RMB appreciation on China’s economic growth ?

13. Brief of China’s Economy and Exchange Rate Regime

14. GDP Per Capita $ 796 $ 9100 1990 2012 2. From 2000 to 2011, the China’s share of global exports appreciated from 3.3% to 10.4% 1. China becomes the world’s largest merchandise exporter and the second largest importer (2009) China’s International Trade

15. Phase 1: Early 1990s, dual exchange rate regime : ● Official fixed exchange rate (1USD = 5.77 RMB) ● Market-based exchange rate (1USD = 8.70 RMB) Criticism: ● Chinese exporters earn more using market based exchange rate ● Foreign investors incur more costs paying by the official exchange rate price Evolution of RMB Exchange Rate Regime

16. Phase 2: In 1994, new fixed exchange rate regime ● Unifying the two previous exchange rate systems (initialling at one U.S. Dollar =8.70 RMB) ● RMB pegged to US Dollars to prevent large swings ● RMB stable trend and regime performed during the years 1994 to 2005 Evolution of RMB Exchange Rate Regime

17. Phase 3: In 2005, new managed floating exchange regime ● Against a basket of foreign currencies such as Dollars, Euros, and Yen” ● RMB significant appreciation trend (18.7% appreciation from 2005 to 2010) Criticism: ● Still Government intervention ● Still undervalued Evolution of RMB Exchange Rate Regime

19. Theoretical Framework Traditional Trade Theory Contractionary Devaluation

20. Traditional Trade Theory Definition of RER: purchasing power of a currency (domestic) relative to another currency (foreign) RMB base currency: if RMB will result in RER

21. Traditional Trade Theory Believes currency (RER) appreciation deteriorate net exports as well as domestic economy Mechanism: If RMB (RER) Result: Export Import Net Export (economy) deteriorate Price of exported products increases = export decreases Price of imported products cheaper = import increases

22. Traditional Trade Theory Appreciation leads to falling AD and low GDP (economic growth)

23. Contractionary Devaluation Core emphasis: traditional trade theory mainly deals with aggregate demand side, while the aggregate supply side is ignored What Effects on AS?

24. Contractionary Devaluation Mechanism RMB appreciates lower costs of imported capital lower production costs supply stimulation Contractionary effect VS. Expansionary effect

25. Methodology & Empirical Analysis Basic regression model & selection of variables Ordinary Least Square (OLS) Vector Autoregressive (VAR)

26. Basic regression model

27. Ordinary Least Square Overview of parameters of independent variables VariableCoefficientStd. Errort-StatisticProb. Ln(INV)0.3158830.0702724.4951610.0000 Ln(MS)0.1042190.0594101.7542230.0859 REER0.0032370.0036720.8816780.3824 INFL0.0217290.0119751.8146250.0760 C-4.2455061.142467-3.7160850.0005 R-squared0.820031 Mean dependent var8.115385 Adjusted R-squared0.804714 S.D. dependent var0.391435 1.Positive Coefficient (contrary to traditional trade theory) 2.Insignificance of REER

28. Explanations of Insignificance REER includes a mix trend of appreciation of depreciation REER is an indirect variable, it affects economy through trade Granger Causality only indicates statistical causality, actual causality should still base on solid theory

29. Vector Autoregressive Definition “Autoregressive”: appearance of lagged value “Vector”: dealing with more than two variables Each variable is explained by its own lagged value and lagged value of all other variables Modified Regression Model (reduced form)

30. Vector Autoregressive Too many individual parameters, hard to interpret them individually Impulse response function (IRF) definition Briefly speaking, IRF trace out the current and future value of dependent variable Y in response to a shock (e.g. increase) in independent variable X E.g. when one-time RMB appreciation, what are the movements of Real GDP in short run and long run?

31. Impulse Response Function How Ln (Real GDP per capita) response to one- time appreciation of RMB (REER)? X axis represents time periods Economy improves first but deteriorates long run

33. * When RMB appreciates * Expansionary effect in the short run * Becomes contractionary in the long run * contractionary outweighs expansionary effect * China’s economic growth may not be severely affected by RMB appreciation

34. * How should Chinese government deal with such negative effects brought by the RMB appreciation in the long run? * Allows slight appreciation to relieve the pressure, small scale negative effects be compensated by monetary and fiscal policy * Appreciation bad for labour-intensive industries, but helps increase the profit of high-value industries, help reforms in export

35. * Include other variables * E.g. Government expenditure as fiscal policy * E.g. output of other countries as variables * Expand length of observations * E.g. Monthly data to observe more results * Increase flexibility of lag selection