Investigation Of The Pass-through Effect Of RMB Exchange Rate Fluctuation On China’s International Trade

With the accelerating process of world economic integration, the competition of international trade is becoming more and more drastic, and there is no dispute that exchange rate has impact on international trade. Scholars never stop researching in this area, a number of studies prove that flexible exchange rate regime encourages the fluctuation of exchange rate, leads to exchange rate risk in the foreign exchange market, which may harm export and import, especially for the export-oriented economy. China adopted a step forward reform of RMB exchange rate regime in July2005, after this reform, China also made a number of adjustments to improve the flexibility of RMB exchange rate regime, the fluctuation of RMB exchange rate is much stronger than before in the aspects of frequency and intensity. Since international trade is an important key to the economic growth of China, the impact of RMB exchange rate fluctuation on China’s international trade caused extensive concern, however, former studies have not reached a common conclusion, and there is not enough discussion about the pass-through mechanism of exchange rate fluctuaiton on international trade. Therefore, this paper is aimed to offer useful supplements to this aspect of research, clarify the principles of the pass-through mechanism of exchange rate fluctuation on international trade, build empirical models to analyze the effect of RMB exchange rate fluctuation on China’s international trade, and generate political implications and strategic suggestions.According to the goals of our research, this paper explores mainly in three aspects. The first one is the theoretical discussion of the mainstream theories of exchange rate and international trade, understanding the principles of the pass-through mechanism of exchange rate fluctuation on international trade. The second one is the empirical study on the effect of exchange rate variation on China’s total international trade by estimating VAR models with variables of international trade status, economic status, export/import price level and RMB-SDR exchange rate. The third one is the empirical study of the impact of RMB exchange rate risk on China’s bilateral international trade by estimating trade models which contain variables such as export/import, exchange rate risk, foreign income and relative export/import price.From our research, the following conclusions have been generated:(1) Theoretically, exchange rate affects international trade by the variation of exchange rate level and the foreign exchange risk caused by exchange rate fluctuation.(2) Empirical evidence suggests that RMB exchange rate affects China’s international trade largely by foreign exchange risk, which has negative effect on China’s international trade, especially export. Therefore, the government should pay more attention to the stability of RMB exchange rate while the reform of RMB exchange rate regime goes deeper, and the unloosening of RMB exchange rate control should be taken place gradually.(3) Neither a small range of RMB depreciation nor the change of relative export/import price would affect China’s international trade significantly.(4) Along with China’s economic development and the upgrading of trading structure, the impact of RMB exchange rate fluctuation on China’s international trade is likely to grow stronger, our government should strengthen publicity and guidance, encourage foreign-trade enterprises to improve the rational utilization of financial hedging tools and insurance products.There are several innovative points of this paper, for instance, this paper has theoretically clarified the pass-through mechanism of RMB exchange rate fluctuation on China’s international trade. Based on the pass-through mechanism, this paper has carried out comprehensive multi-angle empirical analysis from an original research perspective, broaden the scope of the study, hence, this paper may offer greater reference value.