"Macroeconomic Research" published the article "The Impact of RMB Real Effective Exchange Rate on Export after the New Exchange Rate Reform: 2005Q3 - 2013Q3" co-written by Professor Li Xianduo and Professor Huang Changli from our school in its 4th periodical, 2014.

Exports have a significant impact on China's economic development. After the new RMB exchange rate reform in July, 2005, the RMB exchange rate undergoes a continued appreciation and its flexibility is further improved. This paper has sought to make a further exploration in the construction of empirical model and the empirical methods adopted based on the exited research and taking the China’s economic and financial development into consideration. This paper makes an empirical research on how the level and volatility of RMB effective exchange rate (REER) affects the export in China in both the short and the long term after exchange rate reform.

The empirical results indicate the co-integration relationship between China's exports and gross foreign income, gross domestic income as well as RMB REER. The level of REER has a significant negative effect on exports in both the short and the long term, and the active role of the new exchange rate system in the adjustment of China’s foreign trade structure, the optimization of economic structure, the upgrading of industry and the achievement of sustainable development has been more evident. However, there is no significant impact of exchange rate fluctuations, which indicates that exporters are not very sensitive to exchange rate fluctuations, and they focus mainly on market share rather than the risk from exchange rate fluctuations, and that the main export is still at a low level.

Based on empirical result of this paper and combining with the reality of China's economy and finance, we propose the following policy advice:

First of all, being the major exporting country in the world, China develops an economic growth mode which is typically export-oriented and where foreign trade plays a leading role in driving economic growth. But when China’s economy has become stronger than most of other countries, the role of domestic demand may be more important, thus, we should focus on improving the welfare of the household sector. From the perspective of sustainable development in the long term, we should transform the economic growth mode and structures, which is supposed to concentrate on the reform of allocation mechanism, improve the factor prices such as wages, complete the mechanism to expand domestic demand in the long term and coordinate the role of investment, consumption and export in driving the economic development. Besides, considering the excessively rapid growth of tax income for several years, we should particularly make full use of effective methods such as cutting taxes to increase the initial distributed income of residents, besides, we should increase the responsibility and input into social security and people’s life using money from finance to inspire the residents’ willing and ability to consume.

Secondly, we should pay more attention to REER when talking about RMB exchange rate. The export-oriented economic growth mode during the past decades inevitably brings about the imbalanced foreign trade and is closely linked to the distortion of domestic economic structure. For a long term, in the investment- and export-oriented growth mode, factor prices such as wage, interest rate and exchange rate, and the environmental cost of resources are undervalued, in addition, multiple imbalances occur in the economic fundamentals, which results in serious negative externalities and is hard to persist. According to the empirical results, RMB exchange rate may play a regulatory role, and then, the exchange rate adjustment should be emphasized. Obviously, its role is limited, but we should realize that this is a gradual process. From the domestic point of view, we should construct portfolios to eliminate the imbalance in international payments. Measures associated with the appreciation of REER including improving the labor standard, improving wages and social security, emphasizing on environmental protection and reducing export tax rebates are meant to reduce the international competitiveness of exports, and thus, contribute to the progressive elimination of imbalances.

Thirdly, with the reform of RMB exchange rate and the promotion of interest rate marketization, the flexibility and volatility of exchange rate will rise further, which also challenges the risk management of foreign exchange. Regulatory authorities should vigorously promote the development of forward and option market, further reform the foreign exchange system, improve the ability of corporations, residents and financial institutions to deal with foreign exchange risk. Financial institutions should actively strength its risk management system and make use of foreign exchange derivatives markets to manage foreign exchange risk and therefore, develop their business and improve their profitability.