Development Process Of Capital Account Liberalization In China Finance Essay
Capital account liberalization refers to relieves the circulation of capital control under the capital account, which can be divided into two layers: one is to cancel the control of the cross-border capital transactions of itself, two is to cancel the foreign exchange associated with capital transactions including funds transfer of cross-border and the control of foreign currency exchange (Yi Xian Ron, 2001).
(1)The closed operation stage of capital account before the reform and opening
After the founding of new China, it began to implement the national unification exchange rate of RMB, which be adjusted accordingly when necessary. After the collapse of the Breton Woods system in 1973, the Western countries generally had a floating exchange rate system. In order to avoid the inflation and the change of exchange rate in Western countries on the impact of China's economy, our country started to use peg-weighted "a basket" currency exchange rate system. At that time China has implemented a highly centralized planned economy, the country implements “the centralized management, unified management” policy, the foreign trade specially managed by the state-operated Foreign trade company, all the receipt and disbursement by the national management, and all foreign exchange business managed by the Bank of China. This stage, as a result in the planned economy time, our country had neither domestic nor foreign debt, and did not accept foreign investment. So the opening of RMB capital account could do nothing.
(2)The start-up stage of capital account from reform and opening up to the end of 1993
This stage our country started the economic policy which implemented the opening to the outside world, and to stimulate internally, international economic, financial, technical cooperation, foreign investment, encouraging foreign direct investment in China has great development, and positive, rational and effective use of foreign capital has become the main content of China's opening. It began to relax on the domestic residents of foreign exchange management, since 1985 to the boundary foreign exchange for the domestic resident's remittance or from the foreign exchange which foreign took along into, allowed to retain completely, and opened the deposit account in the bank. It allowed all foreign exchange individually-owned involved in foreign exchange adjust since November in 1991(LiYao. 2004). Our country also gradually regulate the cross-border capital flows by laws, administrative regulations and departmental rules, such as in 1979 promulgated "Chinese-foreign joint venture Management Law of enterprise"; in 1987 issued "the Chinese Domestic Organization in Foreign Issue debentures Administrative provisions" and so on. Therefore, this stage can be said that an open capital account start-up stage.
(3)Capital account liberalization gradually advancing stage, since exchange system reformed in 1994
1) The RMB current account convertibility.
In December 28, 1993 the State Council promulgated "the People's Bank of China about further reform Exchange control System's Announcement", announced that they started to implement the RMB exchange rate axle from January 1, 1994. To implement a market-based, single, managed floating system, Cancellation of foreign exchange retention and turned over, the implementation of Bank 3 sale of foreign exchange system, allowing the RMB convertible under current conditions. The official exchange rate exchanged 5.80 Yuan from December 31, 1993 1 US dollar one step and exchanges 8.70 Yuan the axle to 1 US dollar, and in December 1, 1996 announced that it accepted the International Monetary Fund agreement eighth provision the duty, and the RMB project to be frequently exchangeable.
2) Implemented based on market supply and demand with reference to a basket of currencies, and managed floating exchange rate system.
On July 21, 2005, the People's Bank of China issued that "On improving the RMB exchange rate formation mechanism reform of the Notice ", and announced the abolition of announcement of previously pegged to the U.S. dollar. It began to implement monetary policies, based on market supply and demand, with reference to a basket of currencies, and a managed floating exchange rate system. The people's bank of China will be based on market development conditions and economic and financial situation, adjusting range of floating exchange rate.
3) Gradually to promote capital account
The Asian financial crisis in 1997, China has established a management framework of full convertibility of the RMB current account, and part of capital account convertibility which was suitable for China's national situation.
In early 1999, has relaxed capital account management, such as material processing and assembly projects abroad, the material object investment foreign investment to the boundary to exempt connects the profit earnest money, and permission repurchase investment and so on.
In 2001, China's accession to the WTO, foreign exchange management has changed from the "lenient entry, stringent exit" to the balanced management, and adopted a series of measures to advance steadily capital account liberalization, involving securities investment, direct investment and other investments and capital transfer and other related four areas.
November 2002, the State Council promulgated "the cancellation of the first decisions of administrative examination and approval projects," the party in 2005, adopted by the Plenum, "Eleventh Five-Year Plan" clearly suggested that "the progressive realization of the RMB capital account convertibility" and bring the process of the RMB capital account into the five-year plan the first time. On April 13, 2006, the central bank announced that the New Deal foreign exchange management, to fully implement the QDII(qualified domestic institutional investors) mechanism, which is an important step(2008).
The central bank in March 2008 issued "2007 International Financial Market Report" clearly stated that China would gradually advance in the capital of RMB convertibility under the project, and in the near future will stop the examination carried on the foreign investment foreign exchange capital source and the transfer. At the same time, it will also consider that allows the overseas company to go on the market in China, making it easier to foreign institutions in China in RMB-denominated bond issue.
1.1.2Conditions on which Capital Account liberalization depended in China
Capital account liberalization related to the national economy and various aspects of the activity is an important and complex problem. If a country does not meet the basic requirement and hasty conduct, it is not only unable to achieve the goal of capital account liberalization, but bring the enormous risk. Generally speaking, the prerequisite conditions of a country's external capital account as follows:
(1) Strong economic and stable macroeconomic environment.
On one hand, opening capital account can facilitate capital flows and cause a country economy to melt the world economic, on the other hand it puts oneself directly into the world economics fluctuation and under the impact risk of capital flows. In this case, strong comprehensive national strength and the stable macro economic environment is a stable foundation when any congenial behavior facing with impact. Economic strength is not referring to a country's economy of scale, but its comprehensive competitiveness.
(2) Appropriate exchange rate and effective formation mechanism of exchange rate.
The reduction in risk comes from the balance inside and outside of the national economy. Capital account opening and floating rate would be more appropriate to national economic development. According to “Mondale triangle law”: in a open economic conditions, a government can realize two item in one time among the free movement of capital, monetary policy independence and fixed exchange rate system. Specifically, in order to achieve free flow of capital, while maintaining monetary policy independence, it is necessary to implement a floating exchange rate system.
(3) Moderate foreign exchange reserves.
Capital account liberalization, economic uncertainty increases and the relatively sufficient foreign exchange reserves may deal with each kind of impact well and reduces the pressure of international payments. At the same time, the large-scale flow of international capital can cause substantial fluctuations in exchange rate levels, and the monetary authorities may make appropriate intervention to the level of exchange rate in the market by foreign exchange reserves, to reduce the frequency of international capital, and the negative impact by the large-scale flow.
(4) Comparatively perfect financial system.
After opening capital account, a country's financial system is facing the most direct impact of international financial markets. The banking industry is the stable foundation of financial system, so the Banks' bad debt should reduce to a certain level as to ensure a higher credit. Banks and non-bank financial institutions need to have advanced management experience, a modern enterprise operation mechanism, and have the ability to expand the international market in order to face competition from foreign financial institutions.
1.1.3 Current Situation of Capital Account liberalization in China
Since 1979, the reform and opening up, China's capital account began limited and selective opening. But China's capital account transactions and exchange rate remains in effect under certain management, and cross-border flow of capital under certain control. It is also under the restriction of system and the quantity between the RMB and foreign currency exchange. From the transactions, China's capital controls are mainly manifests in the following three aspects:
(1) It is access restrictions for foreign investors into the domestic financial market and domestic investors into foreign financial market. China implements open strategy in the securities is "market segmentation, investors separation" .It allows foreign investors to buy B shares in the territory and the Chinese overseas list H shares, red chips and other foreign stocks and foreign currency bonds issued abroad, but limits it in domestic to purchase A, the bond and the money market tool. At the same time, it limits residents to purchase, sale, distribution of capital and money market instruments outside.
(2) It is restrictions on foreign borrowing by domestic institutions. Foreign-invested enterprises borrow short and long term debt without approval requirements, but the domestic other agencies borrowing of foreign loans need to obtain the qualification and borrowing targets, and go through the financial condition of foreign exchange management department for approval. In addition, domestic financial institutions should approval before it can comply with the provisions of foreign exchange asset-liability management of foreign loans, domestic and overseas non-financial companies can not loan.
(3) It is restrictions on foreign direct investment by domestic institutional constraints. Foreign direct investment in China is mainly on the industrial policy guidance, virtually no other restrictions. The foreign direct investment by domestic institutions need approval by the relevant departments, and foreign exchange management department is responsible for its source of foreign exchange and investment risk audit.
Viewing from the control situation, China's capital account management primarily adopts two forms: One kind is to carry on the control on the interstate capital transaction behavior itself, mainly by the National Synthesis Department and the profession Department responsible for implementing the work, like the planning committee, the People's Bank, Securities Supervisory Association, Ministry of Foreign Trade and Economic Cooperation and so on. The other is to carry on the control in the remittance link to the interstate capital transaction. That is to say, the cross-border capital transactions related to money Import, export and foreign exchange and RMB convertibility is controlled by the international capital account, such as requiring the foreign exchange of external capital account must be recalled domestic promptly and so on.
Generally speaking, China has become the economic and financial globalization beneficiaries because of open capital account on prudent strategy. Since the reform and opening up, China has diversified day by day by using the foreign capital form, the scale expands unceasingly, and the actual use of foreign capital among the best, ranking first in developing countries(Liu Ying. 2006). “by the end of 2001, China already authorized to establish 390484 Foreign-funded enterprises and the total amount of the foreign direct investment has amounted to 395.47 billion dollars; The foreign loan accumulation proposes money sum 409.16 billion dollars; And the foreign loan remaining sum was 170.11 billion dollars; Overseas stock share and red chips going on the market finances 58.6 billion dollars; Distributes B to finance4.63 billion dollars.”(P108. “Developing country finance opening – study on effect and policy”.) The practice indicated that the open or open early in the region or industries, the economy has advanced degree or higher international competitiveness, and the development of electronic industry is a typical example. In the inflow of foreign capital, some enterprises in China have begun to invest abroad. According to Ministry of Foreign Trade and Economic Cooperation statistics, by the end of 2001, the amount of foreign direct investment is 84 billion, and foreign invested enterprises in 6610. At the same time, China's financial institutions overseas assets have relatively considerable scale. With the central bank held 240 billion U.S. dollars of foreign currency reserve assets, financial assets outside China has reached a considerable scale.
China's capital account opening degree measure can be classified into two categories: quantity and rules, the former is mainly based on country real capital flow, and carries on the survey to the proprietary account opening; The latter is the control policy which official adopts through the inspection carries on the appraisal to the proprietary account open influence. The rule target includes: The IMF target, the Share76-95 index, Quinn index, Quinn index (Quinn improvement measure), OECD-share index, Motile-Reinhart intensity index, the Stock market liberalization target; quantitative indexes based on the index system including: based on savings ratio - rate of investment measure target, based on the differences of the measure index, rates of capital flow index (Volume method), capital storage quantity index. These two categories of measurement method represent the main methods in the current theoretical capital account opening measure. And the most representative method has based on the IMF text dual measure method (the IMF law), the Quinn improvement measure method (the Quinn law) and based on the real capital flowing scale measure method (the Volume law), which are often for capital account opening application documents empirical analysis. This measure method has the characteristic respectively, and can reflect the capital account open situation separately from the different side.
1.1.4Advantages and Disadvantages of Capital Account liberalization in China
(1)Advantages of open capital account
Open capital account can improve their efficiency of resource allocation, strengthening domestic capital accumulation, and promote its GDP growth. In particular, the country's financial institutions and companies can obtain funds with lower cost.
First, open capital account helps its execution of healthy monetary policy and fiscal policy. Open capital account makes its constraints for its monetary policy and fiscal policy stronger. Country can not financing by inflation, and the country's economic fluctuation is not because fiscal and monetary policy is not mature, and it conduces to economic development.
Second, the capital account liberalization also increased their residents’ investment options. They have not only native assets but also foreign assets. This can reduce the risk and increase their earnings. As for the actual investment, they still can go abroad to invest and do the optimized combination to investment, so as to improve the efficiency of investment.
Third, capital account liberalization competes with domestic financial institutions in all aspects, or directly participates in joint management with domestic financial institutions. This means that the domestic department does things according to international rules, principles and practices, and guides domestic department to develop in the direction of market, so as to improve efficiency.
(2) Disadvantages of open capital account
First, boom and bust cycles of the flow of capital will bring China enormous adverse effects. The flock effect caused by information asymmetry makes capital inflow into China excessively, as a result, exchange rate appreciation, credit expansion and excessive investment as the adverse consequences turn up. The disadvantage is that capital backflow will lead to loss of their reserves, exchange rate depreciation and the national income depreciated.
Second, the foreign capital inflow leads credit expansion. If foreign capital inflows, and the central bank intervenes foreign exchange market in order to keep its currency stable, then the bank will increase high-energy currency, the supply of money and credit expansion, and finally it will lead excessive investment and inflation.
Third, it increases the risk of foreign currency cash and even causes deposit-loan dollarization. Capital account liberalization directly increases to the vulnerability of banking sector. Foreign capital goes in prosperity of capital inflow. When it suddenly stops to inflow, appreciation and deposit and loan on a regular basis which does not match will bring the huge impact on Banks' liquidity management. (LvYun Wu,2004)
1.2 RMB Exchange-rate
1.2.0Factors that Influenced RMB Exchange-rate
GDP is the basic factor that influences the change of RMB exchange rate with which GDP has a complex relation. Generally speaking, if the increment speed of export is certain, economic increasing will increase the capacity of domestic demand and import, thus, it will lead current-account deficit, form or aggravate the pressure of rate dropping. If the economy growth increases with the synchronization of export scale and even its speed becomes faster, speeding up the export growth will enhance the import expansion and confidence of the currency traders of countries. The demand of currency might more than supply and the demand of foreign currency might less than supply. Meanwhile, the economic growth which often intertwined with the other factors influences exchange rate.
(2) Inflation rate
Inflation often makes dollar go down, prices go up, inhibit the import and accelerate export. If it appears international payments deficit, currency exchange rate will fall. But the effect of inflation has delay. Absolute PPP theory considers that exchange rate which depends on two country’s relative prices is nominal variables. When their prices rise and relative purchasing power reduces, it is the local currency devaluation and exchange rate is down. Conversely, exchange rates rise.
(3) Interest rates
If one country has a higher interest rate than other countries, the country will attract international capital flows and make the domestic demand increase, and currency exchange rate may rise. Keynes, who puts forward Interest rate parity theory: think exchange rate is relative with interest rates between two countries. Investors invest, according to the size of the exchange rate and prediction to exchange rate, to expect to obtain earnings and avoid risks.
(4) International payments
If there is the international balance of payments deficit, foreign debt increasing may lead to increased demand, foreign currency exchange rate rising and currency exchange rate falling. Surplus means foreign currency debt increases. It could prompt currency exchange rate. In recent years, China's international payments have been surplus which supports the RMB exchange rate’s raising.
(5) People's bank intervention
Central Banks intervenes exchange rate in different ways in order to adjust exchange rate and its fluctuations, and buys and sells foreign exchange rate in the foreign exchange market, such as adjustment of domestic monetary policy or fiscal policy, changing the collocation between them, statement about foreign exchange market, and combining with other countries to do direct intervention or indirect intervention through policy coordination etc. However, the intervention of central bank can only influence short-term trend, and cannot fundamentally change RMB exchange rate (Tianjin,2007).
1.2.1 Impact on RMB Exchange rate increasing
Generally speaking, devaluation helps export and restrains import and improves international payments. It must satisfy the Marshall that sum of import and export is bigger than 1. As long as satisfies the conditions, the number of export commodities increasing can compensate for prices’ falling. Export commodity structure is unreasonable and export demand elasticity is low, and even though the dollar goes down, it won’t produce larger demand growth, only to deteriorate trade.
RMB devaluation impacts domestic price level and causes inflation and has adverse effects to China's economic structure adjustment and industrial development. Devaluation expands exports, in fact, provides protection for behind industry, doesn’t help the optimal allocation of resources, and reduces the international competitiveness in the industry. With the opening of the domestic market, they will be closed under strong sniper. Therefore, in the long run, devaluation has potential threaten to establish independent industrial system.
Utilization of foreign capital is our basic policy. Introducing foreign advanced technologies and raising the level of management can make up defect of economic construction. But RMB devaluation will have negative effect to long-term capital and foreign currencies would large-scale withdrawal if RMB will continue to go down , while short-term capital will be devalued quickly. So it will cause further capital flight and foreign exchange shortages, and restrain economic development. (GuoXiaoYu, 2002)
1.2.2Impact on RMB Exchange-rate reducing
(1)Impact on international trade
With RMB revaluation, compared with domestic products the price of imported products will have advantage. This will help Chinese residents to spend less money and enjoy more, and help enterprises to carry out technical renovation. They can spend less money to purchase more advanced technology to enhance the technical level and competition ability and go overseas to merger or purchase foreign enterprises. Although China's current-account is surplus, RMB appreciation will reduce export trade and increase import and deficit is likely to appear. Finally it will produce negative influence to our country.
(2) Impact on national output
RMB revaluation has small influence to domestic investment, but it may have great influence on foreign direct investment. In the global industry division, China's advantage is not the physical resource, but human resources. RMB revaluation equates increasing interest rates, so direct result will be investment cost increasing and investment reducing. In addition, with the implementation of QFII, if RMB revalues, foreign investment yields will improve. This will help foreign investment increase investment to QFII and will bring financial risks in China. Thus, it aggravates the RMB exchange rate fluctuations and we establish good supervision mechanism to perfect the foreign exchange rate policy.
(3) Impact on price
RMB appreciation and foreign product price’s falling helps foreign goods imports to increase and improves Chinese people’s life. In addition, RMB appreciation will produce "social effect" in China and have a bad effect to economic development. RMB appreciation, which causes import and internal commodity prices’ falling according to exchange rate transmission mechanism, will cause China domestic product prices to fall in the stability of situation, aggravate the situation of the deflation intensified and produce unfavorable effects on economic growth.(LiWeiYong LiZiRu, 2003),
1.2.3Model Analysis of RMB Exchange-rate
In China, the researchers who use Neural Network to predict exchange rate include WeiWeiXian and JiangZhengHua in XiAn Jiaotong University, who used Neural Network to establish the mark/dollar Exchange Rate short-term prediction model which indicated that the prediction accuracy of Neural Network is higher than the traditional time series prediction model. DongJingRong (DongJingrong.,2001) put forward a Fuzzy Neural Network non-linear combination forecast method to improve the prediction precision and accuracy of exchange rate and predict 5 kinds of major currencies exchange rate every month from 1980 to 1989. YangXin in Qinghua University using neural network to predict mark/dollar exchange rate, and the results show that neural network model is more effective than random walk. HuiXiaoFeng (HuiXiaoFeng, HuYunQuan,1996), combining the neural networks, time sequence, fuzzy neural network, and genetic algorithm established RMB/dollar short-term forecasting model, and obtained the ideal result. From the research achievements, predicting exchange rate with neural network is effective.
1.3Relevance between RMB Exchange-rate and Capital Account liberalization in China
1.3.1 Capital Account liberalization’s Impact on economic development in China
First, because of the international capital inflows, external savings makes up domestic savings shortages. This helps improve the capital rate and formation. Industrial capital inflows will form domestic investment. Indirect investment will increase domestic capital market liquidity, reduce cost, increase present value of investment, improve enterprise market value, and promote physical capital accumulation.
Second, the foreign direct investment brings not only capital, technology, product and service, management and marketing network, but also technology help to our enterprises in supply chain enterprises in China. This promotes human capital accumulation, product and technology upgrading, industrial structure adjustment and labor transfer and the labor productivity promotion and strengthening the market competition
Third, foreign financial institution enters into dual range of investment and service trade liberalization, strengthens financial market competition, forces the domestic financial institutions to reduce cost, improves efficiency, improve financial, promotes the overall development of domestic financial intermediary system, and improves the credit capital allocation efficiency and the overall efficiency of financial services.
Fourth, industrial capital or financial capital and direct or indirect investment promotes elements, technical and managerial role to acme. In the global it combines production factors and economic resources and plays their role.
Fifth, the international open capital market helps to promote the structural reform of domestic market economic system and strengthening the system construction. It will use more assets for production purpose instead of transfer to improve the efficiency of resource allocation.
Anyhow, capital account liberalization brings capital inflows in direct and indirect way to promote the substance capital accumulated, human capital accumulation and technical progress, and promote economic entity department and the financial system to develop and be strong, and improve domestic and international resources allocation efficiency and promote national economic growth. （MengYanHui 2006).
1.3.2Capital Account liberalization’s Impact on formation mechanism of exchange rate in China
Exchange rate system will completely change the formation mechanism of exchange rate system when it doesn’t refer to arrange appropriate degree. According to the current exchange rate system arrangement, with the degree of open capital deeper, capital flows t has more and more great influence to the formation mechanism of exchange rate. The way as follows:
(1) With the capital account liberalization deeper, short-term capital liquidity becomes bigger and the proportion in all capital flows is gradually increasing. Short term capital contains "hot money" whose investment direction is not certain, and also in a certain extent implies the existence of "hot money" that will produce pressure to RMB exchange rate revaluation.
(2) In capital account management of “attach importance to inflows and belittle outflows", capital liquidity of asymmetry management causes foreign exchange reserves to increase. RMB faces huge pressure. Although at present the focus shit to outflow, it still takes some time to deal with past asymmetric capital management.
(3) Foreign exchange administration system of "forced" is one of important reasons that causes foreign exchange rate reserves excessive growth. In the compulsory system, as they expect enterprises cannot own foreign exchange rate whose demand suffered serious distortion. In the central bank foreign exchange reserves has increased year by year to make RMB revaluation pressure huge. When open capital account goes further, or takes more elastic floating exchange rate system, the influence factors of exchange rate mechanism may be changed and the new formation mechanism of exchange rate will generate LiuXiaoMan 2008).
1.3.2 Capital Account liberalization’s Impact on Financial markets in China
In recent years, in China's economic and financial problems, ZhangZhiChao (2003) with sequence theory analyzed and got the result that the capital account liberalization’s positive impact depended on certain conditions. Now China is taking the incremental opening-up strategy mainly based on open capital account that is a high risk process. LiLingBo and WangShouYang (2004) analyzed capital controls’ impact on development of financial markets since the reform and opening in China. The empirical results show that capital controls is positively related to the development of China's financial market in the long run, and as time moves, the positive correlation is in the waning. Laurenceson and Tang (2005) using panel data model studied the relationship between Chinese capital account liberalization and financial stability, and the results show that capital account liberalization will influence the international capital flows. If China completely opens its capital account, so the proportion of indirect investment flow in GDP(SUM of portfolio investment and other investment amount) will go up about 4.6 percent. Thus, this will have serious challenges to the financial stability policy of China's monetary authorities, but this can not make China and other sample countries to produce serious financial instability and financial crisis. This dissertation will provide a measurement method of set of financial instability whose data includes sum of official statistics of direct investment and the absolute of the unofficial
indirect investment flow. Bouvatier (2006) studied and the study shows that China's capital controls can not prevent the international hot money inflows since 2001and the early warning signs of financial instability.
1.3.3 Capital Account liberalization’s Impact on government’s decision in China
With the opening capital account expand, our government should also make proper adjustment to some policies, and actively expand the utilization of foreign direct investment to further deepen the reform of foreign direct investment, support domestic enterprise "going out", steadily improve debt securities investment, perfect foreign debt management, strengthen to monitor liquidity investment and RMB exchange rate reform in revaluation, actively develop foreign exchange rate market, deepen the reform of domestic financial system, and further accelerate transformation of micro economic operation mechanism and sound macro-economic control system, and strengthen the monetary policy and fiscal policy coordination. China's capital account liberalization is a gradual development process, but we believe, in the former 15 years of the 21st century, with China's sustained economic development, China will further relax capital account control, and realize the final open China's capital account.
With this chapter，it will show the research method of the trend of RMB Exchange-rate concerning capital account liberalization in China. The method based on experience and research results of foregone researchers discussed the current trend of RMB exchange-rate.
2.1 research problems
The researchable question for this dissertation is as follows: “The study of RMB appreciation or devaluation concerning capital account liberalization in China” in a statement study of the change of RMB exchange-rate on the ground of capital account liberalization in China.
This research will two statements as follows：
First statement is as we know from the literature review， the degree of capital account liberalization can influence the change of RMB exchange-rate, so different degrees will produce different RMB exchange-rates. In order to more easily and precisely predict the trend of RMB exchange-rate, this dissertation has a hypothesis that capital account liberalization is assured。
Second statement is the dissertation’s speculation is based on the short speculation. Because technical analysis method was not based on certain economic theory, the prediction method is often based on the historical and experience summarize, thus it can’t judge the medium-term behavior and long-term behavior.
This dissertation will attempt to answer this question from the quantitative perspective. But meantime there is a hypothesis that the current degree of capital account liberalization in China is assured. Based on this condition the dissertation, if it can be finished completely and perfectly as we expect, it must deal with two questions related with RMB exchange-rate. One of the two questions is that how to model and which model it need to predict the trend of RMB exchange-rate accurately and scientific and the other is that when it gets the data that the research needs, how to handle it and what is the scientific and specific method and how to decide the variable and the value of hidden variable.
RMB exchange rate is a complex of nonlinear dynamic system which influenced by various factors interactively. It is difficult to realize the long-term and accurate prediction to RMB exchange rate. The main reasons are that the prediction method needs to do some assumptions before modeling. These assumptions’ correctness or fault will make a great effect on the precision of prediction. This dissertation , based on the opening capital account, according to the factors of GDP, the inflation rate, the interest rate payments and The international balance of payments influencing RMB exchange rate, analyzes the change of RMB exchange rate , models and predicts the trend of RMB exchange
Rate by SPSS software’s handling the data. In order to more accurately predict RMB exchange rate to dollars, this dissertation ,using research achievements of current neural network , uses actual data to realize the prediction of exchange rate of the US dollars to RMB and do scientific prediction to the recent trend of RMB exchange rate, starting from the neural network.
2.3 Research Approach
2.3.1 Deductive and critical
The critical approach will be showed two sides, choosing the method of modeling and predicting the trend of RMB exchange-rate. According to our seniors’ research experience, we can make a much better decision to decide which method we should use to solve the problem to achieve our aims from the disadvantages and advantages of their methods. Moreover, when we speculate the RMB exchange-rate out ,we can use a method to examine the right or wrong results and explain the reason critically.
The deductive approach to research RMB exchange-rate is based upon the data being collected .By collecting, analyzing, handling, and comprehensively researching the data, with the relevant theories and knowledge and SPSS software, it can speculate whether RMB exchange-rate goes up or down.
2.4 Research Strategy
The data is accompanied by human activities, from primitive symbols to the data recorded on paper, and in different productive environment, there are different load mode and expression mode. With the deepening of Informatization Construction, more and more enterprises and firms use and implement the information system, and electronic data also shows more and more powerful. What constitutes the basic elements of information system is the data that is the base of information. Data has become a very important part in information system and the important resources in the process of informatization. The data in the information age mainly refers to the electronic data. Electronic data played an important role in the information system. Therefore if you want to master our information better, you must collect electronic and make proper use of method to process electronic data.
In order to predict RMB exchange-rate more accurately, the dissertation will choose the persuasive data from official institutes in China. The case of this dissertation comes from the people's bank of China，National Statistics of the People's Republic of China, the State Administration of Foreign Exchange. The data can explain the development of our country economic and social. The different kinds of data can be worked out at all other different types data that we need ,such as inflation rate，GDP，RMB exchange rate，interest rates，the international balance of payments and so on .through the data we can know clearly the relevance between the factors and the trend of RMB exchange-rate influenced by GDP, inflation rate, interest rates, the international balance of payments.
2.5 Research Methods
In this dissertation, in a whole, there are four research methods of quantitative analysis, literature research, number of research and simulation method applied. Following I will introduce every method particularly.
2.5.1 Quantitative analysis
Research on things can not do without quantitative analysis. Quantitative analysis is one basic way of deep understanding things. In the closely relation with quantity and quality, it is always the quality of the certain things shows a certain amount. The quality of the things is always takes certain amount accumulated as the foundation. Therefore, the knowledge to things, starting from the quantity, can grasp the essence of inherent characteristics from things and basic regularity. Although the study objects is still to better understand the qualitative of things and quantitative analysis and qualitative analysis in the research process are very important, the purpose of qualitative analysis is, through logical analysis, mutual comparison and the basic reasoning, to mutual understanding of the inherent nature of things. Usually it can turn out through interviews, observation and comprehensive. And quantitative analysis is based on data research to characterize the characteristic. It needs to do quantitative analysis generally according to the thing itself, through the observation, the comprehensive, and often necessarily choose analysis tools. Therefore, in some degree, in understanding the nature of things, quantitative analysis is more objective and operability than qualitative analysis. For a more scientific quantitative analysis, as quantitative analysis system, in recent years, quantitative analysis is paid more and more attention. In scientific research, quantitative analysis can make people know so much further precision knowledge, in order to more scientifically grasp the essence, clear the relevance and predict the development of things. Quantitative research is a kind of study which determines the amount of things and explains the stipulation phenomenon and problems wit data and than to analyze and test it, and to obtain meaningful research. Quantitative, is based on digital symbols to measure. Quantitative research determines the object characteristic value ，through comparing with the characteristics of research objects in some criteria, or do a certain the quantity change regularity between factors. 。This dissertation turned the problem of RMB exchange-rate into the problem that can be measured by the relationship of collected data to analysis, explain and examine the data。
2.5.2 Literature research
Literature research obtains information according to certain research purpose or subject through investigation, thus it can understand the problem to study comprehensively and correctly. Literature research widely used in various disciplines in the study can help us to learn about the history and current situation, determine the research subject and observe the general impression on study, and get real data compared and the panorama. No inheritance, science cannot get the rapid development. The people need the previous literature when they are researching historical facts, and in development science they are in need of inheritance of outstanding achievements. Modern science research needs not only the cooperation between persons, but uses the results of previous research work. Scientific literature is the important measures and methods using "the previous work achievement", and is conditions and basis to promote the cooperation and achieve ". Generally speaking, the scientific research needs fully material and relevant literature to master the research dynamic progress understanding achievements and the research status predecessors have. This is a scientific and effective way that any scientific work goes inevitable stage.
This dissertation finds out relevant research achievements through relevant literature collection with capital account liberalization and the RMB exchange rate. According to the present and past research results , it puts forward the point of this article ,the opinion and the suggestion to provide basis and condition for the current research.
2.5.3 Number of research
The number of research on specific methods is from the relevant discipline, especially the statistics, economics, system engineering, cybernetics, operational research, decision theory and so on. With the emergence and development of the discipline, the number of research method system is more abundant, at the same time, also develops. Number of research, also named "number of statistical analysis" and "quantitative analysis method, through the research of the relationship between scale, speed and scope, reveals the relationship, change rules, and the development trend of things so as to achieve to explain and predict things. The meaning of number of research has broad and narrow meanings. Broadly, the study of number characteristics and relationships require a series of special and generic methods. All these method is called number of research. In narrow sense, number of research is in certain theoretical guidance, complying with the principle of the mathematical and statistical principle, a name of a series of methods of study, analysis and decisions to economic phenomena, relationship and limits through handling relevant data.
This dissertation based on the generalized analysis method, through processing the collected number , modeling ,researching number characteristics and relationships of related factors, predicts RMB exchange rate.
2.5.4 Simulation method
According to the main characteristics of the first prototype, the simulation method is a method which creates a similar model, and then through the model studies a prototype in the indirect way. According to the similar relationship between the model and prototypes, the simulation method can be divided into the physical simulation and mathematical simulation. Nowadays, with the development of science and technology, mathematics widely used in various areas of science and technology, especially the in popularization of electronic computers advanced technology. The simulation method becomes one of main methods that puts forward a new science and explore the unknown indispensable and its application scope becomes wider such as the brain simulation, tactical training, engineering simulation and analog economic management, etc. Simulation method can research the phenomenon when things have changed or things have not turned up. And it also can research the system that can not open and not observe state from outside the internal directly, research, and it can simplify, enlarge or shrink phenomenon, and can be easily controlled and more economic.
This dissertation predicts the RMB exchange rate through analyzing the related factors that influence RMB exchange rate, and modeling the neural network model.
2.6 Data collections
Based on the assumption that the open capital account is certain , this dissertation analyzing RMB exchange rate changes which is influenced by GDP, inflation, interest rates, the people's bank payments. So in this paper data collection is from GDP, inflation, interest rates, the international balance of payments, and RMB exchange rate. China since July 21, 2005, has started to put the regulatory floating exchange rate system into practice and at this time the RMB exchange rate fluctuations becomes more and more big. Especially after the reform of RMB exchange rate, RMB become more value to US dollars and makes the RMB exchange rate continuously become key problems in economic cooperation between American and Chinese. After 2005, China's capital account is really open. So sample number is too small from 2005 to 2010, and the unit time is different from GDP and inflation, interest rates, international balance of payment and the RMB middle period exchange rate. Calculation of GDP is in a quarter, the inflation rate is calculated by month, interest rates, according to the Theory of Purchasing Power Parity, are calculated by month, and international balance of payment is calculated by year , and RMB exchange rate is calculated by day. Thus, based on the consideration of accuracy and sample number this paper collects data by month as the unit. The data is from July 2005 to May 2010, and includes 300 samples data with RMB middle period exchange rate authorized by China's foreign exchange center, GDP and inflation, interest rates, the international balance of payments as the original data of empirical research.
This dissertation has a data sheet including five kinds of data: GDP inflation, interest rates, payments, RMB exchange rate.
GDP calculation: GDP value of each month can be considered the average of GDP of each quarter.
Inflation rate calculation: Collected data includes the monthly consumer price index. The formula is that ( CPI at the same month –CPI in the last month) / CPI in the last month.
Interest rates calculation: collected data includes RMB exchange rate to US dollars and US dollars exchange rate to RMB. According to the theory of purchasing-power parity, interest rates can be expressed as: (F-S) / S =I -I * S is RMB exchange rate to US dollars, F is US dollars exchange rate to RMB, I is interest rates in China, I* is interest rate in US.
International balance of payment calculation: Data collected includes often project and capital account and financial account data every year and then the data is equally distributed into each month.
RMB exchange rate calculation: data collected is the RMB daily exchange rate. And then it can choose the SUM function firstly and choose average function to every day value this month secondly.
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