The Study On The Pass-through Effect Of RMB Appreciation On China’s Domestic Price Index

The People’s Bank of China announced a managed floating exchange rate system at2005. The RMB has appreciated more than30%since then. Due to China’s huge foreign exchange reserves and the continuous large trade surplus, the western countries blame renminbi for their own economic stagnation. In the foreseeable future, the renminbi would still face large appreciation pressure. In this context, the impacts of RMB appreciation to domestic macro variables deserve special attention. On the other hand, after the reform and opening up, our country has undergone several rounds of inflation and deflation, such as serious inflation of2007and continuous deflation around2008. Every inflation and deflation are presented greater challenges on China’s macro-control. Existing research shows that exchange rate fluctuation will affect domestic prices, but reflecting some differences in the degree of influence in different countries. Based on the above background, the study of RMB appreciation on China’s domestic prices, undoubtedly has important practical implications. Despite in-depth researches of the impact of the exchange rate on the prices in other countries, but international scholars’ concerns may be not the same as China should be most concerned about. Looking at the domestic research, there is a lack of research on the exchange rate pass-through on domestic prices of different levels, and that this is the basic motivation of this study.In theory, this dissertation summarizes and compares theoretical models of exchange rate pass-through, and then selected the more novel exploratory research perspectives. Theory suggests that exchange rates may have an impact on a country’s domestic prices. Firstly, exchange rate fluctuations have some impact on import prices. Then the impact will be transmitted to domestic prices of various commodities, forming impact on overall domestic prices. Existing literature tends to imply that the exchange rate appreciation may curb domestic inflation, but there are also some different conclusions. After the financial crisis, asset price volatility receives more attention (domestic prices CPI does not include asset prices). International experience shows that asset prices tend to fluctuate with currency appreciation. In summary, this dissertation selected three perspectives that exchange rate affects domestic prices:import prices, the total domestic prices, domestic asset prices (represented by stock prices). From the empirical application point of view, this dissertation was based on specific research questions, flexibly used the cutting-edge measurement models like the Factor Augmented Vector Autoregression model (FAVAR model), Unobserved Component Model (UC model), and traditional measurement methods such as vector autoregression model (VAR model), autoregressive distributed lag model (ADL model), in order to get some innovative conclusions. Despite this dissertation does not pursuit for the complexity of measurement technology, but the more cutting-edge measurement methods can study more complex problems, and get more accurate conclusions based on ensuring the applicability of econometric models. In this sense, the innovation of this dissertation was mainly reflected on the application of innovation of measurement models and attempt to get implications for existing theories from conclusions the dissertation has. The main conclusions are as follows:(1) This dissertation studies the different pass-through effects of RMB appreciation on import prices and manufacturing sub-sectors prices from the Sino-U.S. manufacturing price data. We collected up to more than1000kinds of the most representative of the original data of Chinese and the U.S. manufacturing trade goods, and calculated the unit prices we used in the model. The results of this dissertation show that the RMB appreciation on China’s imports from the U.S. manufacturing product prices transfer coefficient is0.66. The pass-through of the RMB exchange rate appreciation was incomplete, but also effectively reduced the purchase price of U.S. manufacturing product China imported. Secondly, the pass-through effects of different sub-sectors of manufacturing import prices have significant differences. Textile product transfer coefficient was0.95, while the rate of power machinery and equipment transfer coefficient was0.47. It showed U.S. exporters pricing power in different sectors in the Chinese market is different. Finally, there are some differences in the pass-through effects on import prices and export prices. The export transfer coefficient of Sino-U.S. manufactured goods was0.53, lower than the import transfer coefficient. The textile products manufactured goods were even lower.(2) Based on a single-equation ADL model and high-dimensional FAVAR model, this dissertation studied the pass-through effect of RMB appreciation on domestic inflation index and different classification CPI indices. The results showed that the inhibitory effect of RMB appreciation on the CPI strengthen at first and then gradually weakened. The transfer coefficient of the RMB exchange rate appreciation against the CPI was0.22in long term, the exchange rate pass-through effect was obvious. Secondly, the degree of the pass-through effect of RMB appreciation on CPI and PPI were significantly different, pass-through effect on PPI was stronger than the CPI. Possible reason was that the appreciation of the renminbi will first affect the price of imported goods, and then transfer to the PPI, and finally the CPI, pass-through effect may abate in the processing time. Finally, the impact of RMB appreciation on the price of the classification CPI has some regularity. Food prices have the strongest pass-through effect, followed by the housing prices, transport and communications, tobacco and liquor goods have the weakest pass-through effect. There are some major differences from the processes of the classification CPI.(3) This dissertation used UC model and VAR model to study the pass-through effect of RMB appreciation on the stock market prices and different industries stock market prices, as well as analysis of the time-varying pass-through effects. UC model results showed the opposite relationship before2008and after2008of periodic components of RMB exchange rate and stock market prices. Prior to2008RMB appreciation was accompanied by rising stock market prices, after2008RMB appreciation accompanied by the stock market prices declined. It showed, before2008the international capital inflows mechanisms played a leading role, after2008the competitiveness of enterprises played a leading role. Second, the impact of RMB appreciation on the stock market price index reflects the increasing trend. The ratio of the Shanghai Composite explain the fluctuation was only1.13%during the entire sample period; the ratio of the Shanghai Composite explain fluctuations was around1.1%during the period2005-2008; the ratio approaches2.5%for the period2009-2013. Finally, there is the impact of RMB appreciation on the stock market price index for different industries differences. Interpretation of the ratio of stock market volatility shows different in different industries, the energy and materials industry was the largest, the smallest is the telecommunications service industry, daily consumer goods industry, IT industry and healthcare industries.(4) This dissertation summarized the experiences that the impacts of RMB exchange rate appreciation on import prices, inflation and asset prices represented by stock prices. Experiences from the currency appreciation in Japan and Germany, the sharp appreciation of the yen led to the emergence of inflation and bubble. In contrast, the initiative gradual process of appreciation of the German mark provides a useful inspiration. Therefore, the progressive appreciation strategy of RMB against the U.S. dollar is correct. On one hand, it can reduce external pressure. On the other hand, it can avoid volatility of the domestic economy. When macroeconomic environment is stable, the rhythm of RMB appreciation can accelerate; while macroeconomic environment is volatile, the rhythm of RMB appreciation should be slowing down.According to the empirical results of this dissertation, we provided policy recommendations as following:First, the PBOB should control the pace of RMB appreciation, to avoid the sharp RMB appreciation. Although the empirical conclusion showed that the RMB appreciation can curb domestic inflationary pressures to some extent. But the positive and negative experiences of Japan and Germany showed that the sharp appreciation could harm domestic macroeconomic stability. If the RMB appreciate were too quick, it would seriously affect China’s export enterprises to attack China’s real economy. If the real economy had been severely damaged, it would cause a large number of international hot money outflows, which would cause the asset bubble burst., Japan is a classic example in the90s last century. Second, policymakers need to consider the degree of RMB exchange rate pass-through. Therefore, China must increase the research about exchange rate pass-through, and incorporated the exchange rate pass-through effect into the framework of policy making as soon as possible. Third, refine the analysis of differences in characteristics of exchange rate pass-through effects. From this dissertation, the RMB exchange rate pass-through effects showed different between import prices and export prices, the different sub-sectors of imported goods, different classification index inflation index and different sectors of the stock market prices. From the regulatory point of view, the regulation of exchange rate pass-through should have some pertinence.