Academic journal article Global Journal of Business Research

How China to U.S. Foreign Exchange Rate Relates to U.S. Interest Rate and Bank Loans

Academic journal article Global Journal of Business Research

How China to U.S. Foreign Exchange Rate Relates to U.S. Interest Rate and Bank Loans

Article excerpt

ABSTRACT

This research investigates the interactions of U.S. interest rate, the different types of bank loans at all U.S. commercial banks, production activities and the foreign exchange rate between U.S. and China. This paper uses monthly data from 1981 to 2012 to show that some U.S. bank-loan-related macro-economic indicators are related to exchange rates between U.S. and China. The results demonstrate that U.S. short-term federal funds rate, U.S. manufacturing capacity utilization, and three types of banks loans at all U.S. commercial banks could be good predictors and determinants of the overall exchange rate between these two important international currencies.

JEL: F31, F33

KEYWORDS: Foreign Exchange, Interest Rate, Loans, U.S., China.

INTRODUCTION

The continued strength and vitality of the US economy continues to attract economics forecasters. According to the International Monetary Fund, the U.S. GDP of $15.1 trillion constitutes 22% of the gross world product at market exchange rates and over 19% of the gross world product at purchasing power parity (PPP). Though larger than any other nation's, its national GDP is about 5% smaller than the GDP of the European Union at PPP in 2008. The country ranks ninth in the world in nominal GDP per capita and sixth in GDP per capita at PPP. The U.S. dollar is the world's primary reserve currency. The United States is the largest importer of goods and third largest exporter, though exports per capita are relatively low. In 2010, the total U.S. trade deficit was $635 billion. Canada, China, Mexico, Japan, and Germany are its top trading partners. In 2010, oil was the largest import commodity, while transportation equipment was the country's largest export. China is the largest foreign holder of U.S. public debt.

China has experienced a remarkable period of rapid growth spanning three decades, shifting from a centrally planned to a market based economy with reforms begun in 1978. During this time, it grew at an average rate of about 9.7% per year, with exceptionally strong growth in the period of 2003-2007 averaging about 1 1% per year. Growth remained strong during the recent global financial crisis, reflecting massive stimulus and strong underlying growth drivers. China became the world's second largest economy in 2010. Increasingly, it is playing an important and influential role in the global economy.

Research about the relation of US interest rates, and other factors with the foreign exchange rates between US and China plays an important role. However, it is difficult to predict the exchange rate movements since there are many short-term and long-term factors and disconnections between the leading macroeconomic indicators and the nominal exchange rates (Hellerstein, 2008). This study investigates the interactions of some U.S. indicators in the banking system as a whole, such as interest rates and outstanding bank loans to determine the exchange rate between the U.S. dollar and China Yuan. These two countries are top economic entities in the world and their currencies are most traded in the foreign exchange (Forex) market (Wikipedia, 2012). U.S. and China also are important mutual trading partners with significant imports and exports in goods and services.

The remainder of the article is organized as follows. The next section reviews the literature development of U.S interest rates, the categories of outstanding banks loans at all U.S. commercial banks and the foreign exchange rate of U.S. and China. It also points out the direction & focused issues of the current research which will contribute to the existing body of literature. Section 3 describes the methodology, data collection procedures and the formation of five hypothesis & final sample. Section 4 discusses the empirical results. Section 5 presents the summary and conclusions focusing on the implications and ideas for further research.

LITERATURE REVIEW

In foreign exchange markets, interest rates are an important factor for the exchange rate. …

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