| On July21,2005, China began to follow a managed floating exchange rate regime of RMB, adjusting based on market supply and demand and referred to a basket of currencies fluctuations. By the time of January2014, the exchange rate of RMB to USD had appreciated from8.11to6.11, cumulatively appreciating24.66%. According to the traditional theory of international payments, currency appreciation will reduce exports and increase imports, thereby reducing net exports, but in the context of the continued appreciation of RMB, China’s current account still maintained surplus, making the relationship between exchange rate and foreign trade became the focus of academic research once again.As a conversion ratio of the two currencies, exchange rate is a critical tool to achieve internal and external balance of a country’s economy and the most direct and effective means to coordinate the international economic relationship. Exchange rate fluctuations will not only change the relative prices of goods and services between home and abroad, but also change a country’s trade balance, resulting in a long-term impact on its economic growth. Therefore, the analysis on the impact of the RMB’s exchange rate volatility on China’s foreign trade will relate to the stable and healthy development of its foreign trade and the further reform process of the RMB exchange rate regime, as well as to the sustainable economic development and the harmonious international economic relations between China and its trade partners, which are the theoretical and practical significance of this paper.A systematic theoretical system of the research on the relationship between exchange rate and international trade has been formed, from early Price-Specie-Flow Mechanism to elasticity theory including Marshall-Lerner condition and J-curve effect, then to absorption analysis theory and monetary analysis theory which improved elasticity theory, and finanlly to the exchange rate and trade balance theory. Basing on these theories, this paper focused on the impact of the RMB exchange rate fluctuations on China’s import and export trade. By using aggregated and disaggregated trade data, we estimated the price elasticity and income elasticity of demand, as well as the elasticity of exchange rate pass-through (ERPT). Meanwhile, from the perspective of choosing trade invoicing currency, the paper empirically researched the determinants of PCP and then evaluated the RMB’s feasibility as a pricing currency to avoid exchange rate volatility, so as to provide useful suggestions and comments on the current reform of the exchange rate system and the development of foreign trade.This paper was divided into seven chapters.Chapter I was an introduction, presenting the research background and significance, methods and structure, as well as the innovations and improvements of the paper.Chapter II was the literature review, mainly summarizing the existing theoretical and empirical studies. This chapter included basic concepts of analysis, the review of ERPT effect, the impact of exchange rate fluctuations on foreign trade, the determinants of choosing trade invoicing currency and a theorical analyse on the impact of exchange rate volatility pass-through on trade and so on, in the last part of this chapter was a simple summary.In Chapter Ⅲ, we reviewed the evolution process of the RMB exchange rate regime firstly. Secondly, the trend of RMB exchange rate fluctuations against four major currencies was compared. Finally, we used the GARCH model to estimate the volatility of the RMB nominal exchange rate against USD from July21,2005. It was found that the RMB exchange rate fluctuations showed clear unilateral trend with an increasing volatility; return series presented a peak and fat tail characteristics; exchange rate fluctuations appeared obvious clustering and leverage during sample period.In Chapter IV, we used aggregated data to discuss the impact of ERPT on foreign trade. Firstly, an overview on China’s trade was elaborated from the perspective of trade size, structure, mode and subject. Secondly, a fixed-effects panel model was used to estimate the price elasticity and income elasticity of China trade with its14trading partners from1998to2012. It was found that, the sum of import price elasticity and export price elasticity was less than1, indicating that the Marshall-Lerner condition could not be satisfied. This conclusion explained the phenomenon that China’s trade surplus was still growing with the continued appreciation of the RMB. The sum of import and export price elasticity of Canada, India, ASEAN, Japan, Korea, Taiwan, and South Africa was greater than1, meaning that the Marshall-Lerner condition could be satisfied; while for the other countries the Marshall-Lerner condition was not met. This could give a reason for that Sino-US and Sino-EU trade surplus were not improved since the RMB exchange rate reform in2005. Meanwhile, the income elasticity was greater than the price elasticity for most countries, which implied China’s trade surplus was mainly due to economic growth while the exchange rate volatility was only a secondary factor. Finally, we used the VAR model, cointegration technology, Granger causality test and other methods to estimate the elasticity of ERPT:import and export elasticity were all less than 1, indicating that the ERPT effect in China was incomplete. In the short term, the import price index was mainly affected by the nominal exchange rate, while the export price index was mainly influenced by competitive pressures and marginal cost; furthermore, there was a significantly lag in the impact of the nominal exchange rate volatility on the import price index, while the impact of the nominal exchange rate volatility on the export price index was not significant. It was because that China mainly imported raw materials and resources while chiefly exported manufactures, meanwhile, it meant that the international competitiveness of China’s exports was weak, once the exchange rate fluctuated, exporters could only absorb exchange rate fluctuations through the long and slow price adjustment.In Chapter Ⅴ, we used disaggregated data to discuss the industrial impact of ERPT on foreign trade. Firstly, the paper discussed the development of trade size, structure, mode and subject of various industries. Secondly, a fixed-effects panel model was used to estimate the price elasticity and income elasticity of8industries from1998to2012. It was found that, on the import side, the import price elasticity of textile industry was the largest while that of mining industry was the least. Because imported textiles faced fierce competition in domestic market while imported crude oil and refined oil showed a significant irreplaceable feature. The import income elasticity of electrical and electronic industry was the largest while that of agricultural and food industry was the least. The reason was that electronic products belong to non necessities while agricultural products belong to necessities. As for export, export price elasticity is greater than import price elasticity in most industries, indicating that export commodities faced more competition than import goods. The export price elasticity of textile industry was the largest, showing that those exported textiles were easily affected by exchange rate volatility because of their lower technological content; while the export price elasticity of agriculture and food industry was the least with their essential characteristics. Except for agriculture and food industry, income elasticity was larger than price elasticity, meaning the strong external dependence of China’s exports. The export income elasticity of textile industry was the largest, which meant that its low value-added characteristics decided it was easily affected by foreign income volatility; while the export income elasticity of agriculture and food industry was the least. Whether import or export, income elasticity was larger than price elasticity, indicating that China’s foreign trade was mainly influenced by income and exchange rate was only a secondary factor, which was consistent with the conclusions of section4.2. Finally, basing on the industrial data of HS classification, we used the VAR model, cointegration technology and other methods to estimate the industrial elasticity of ERPT. It was found that the differences between various industries were very significant. There was an excessive import transmission in mining while incomplete import transmission in electrical and electronic industry, the former was because that the pricing of resource products was mainly determined by the exporters. On the other hand, the export elasticity of ERPT in mechinery and transport was the biggest, meaning that because of its high value-added products, manufacturers could totally even excessively pass the appreciation of exchange rate to the price; while the export elasticity of ERPT in timber and paper was minimum, indicating that there was a high degree of homogeneity in this industry and manufacturers could only cut prices to absorb the impact of RMB appreciation. For the lag of12, the impact of exchange rates on the import and export price indices were significantly not zero, confirming the existence of hysteresis in ERPT. The impact of exchange rate fluctuations on the import price index in mining and metallurgical industry was the greatest. Because such as crude oil, coal and iron ore and so on are invoiced in dollars, RMB had been appreciated mainly against the dollar since2005, which was bound to have a greater impact on import prices index in these industries. The import price index in agriculture and food industry was also affected by exchange rate largely, which was concerned with the longer agricultural growth cycle. The impact of market pressure index on import price index for all industries except textiles was less than that of marginal cost and exchange rate, indicating that the most important factor affecting import price index was the cost of production and exchange rate changes. The impact of exchange rate fluctuations on the export price index of machinery and transport was largest, showing that the weak replacement of machinery products and the strong pricing power of the exporters. The impact of competitive market pressures on export price index in agriculture, chemical, wood and paper and textile was greater than that of marginal cost and exchange rates, indicating that their weaker international competitiveness and higher dependence on price competition. The short-term elasticity of ERPT in all industries was less than the long-term one, reflecting the lag of ERPT. Meanwhile, the short-term export elasticity of ERPT were less than the short-term import one which showed again that China’s low international competitiveness, so exporters could only adjust their price slowly to absorb the cost of exchange rate fluctuations.Considering the choice of trade invoicing currency could reduce the exchange rate fluctuations to some extent and then reduce its impact on trade, Chapter VI studied the determinants of choosing trade denominated currency empirically. First of all, an overview about the current using situation of trade denominated currency was expressed. Secondly, the theoretical analysis followed from the perspective of microeconomic, macroeconomic and other factors. Then, an unbalanced panel model was used to empirically test the determinants of PCP. The results showed that economic size, market share, developing level of financial markets, currency stability, product differentiation and negotiating ability of exporters were the most important factors affecting the choice of PCP. Finally, the condition of RMB as a trade invoicing currency was assessed.Chapter Ⅶ was the part of conclusions and policy recommendations.
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