Exports Of Agricultural Products Of The Rmb Exchange Rate Changes Effect: Theory And Empirical Research

Since the breakdown of the Bretton Woods system in 1973, exchange rates have been allowed to float almost freely and frequently in many countries, while the growth rate of international trade between these countries slowdowns. The effect of exchange rate fluctuations on trade, therefore, has been considered as an important theoretical and empirical issue. Since the reform of Chinese yuan exchange rate formation mechanism in July 2005, Chinese yuan has been in frequent fluctuations and appreciating gradually. As farmers are still the majority of the population of China, the effect of China's RMB exchange rate changes particularly its appreciation on agricultural trade, which affects the welfare of farmers, is worth exploring. Probing this problem also has its theoretical significance through enriching the research on the trade effect of exchange rate movement in developing countries. Therefore, this paper attempts to explain the impact of RMB exchange rate changes on China's agricultural exports from two aspects of theoretical and empirical in a preliminary.On the basis of full and accurate literature review, this paper develops a theoretical model that explains the impact of exchange rate change of RMB on China's agricultural product export, specifies the empirical model following the econometric method, estimates the impact of the exchange rate change of RMB on Chinese agricultural export taking China's agricultural exports to Japan as an example, and interprets the policy implications among the empirical results. This paper responds tentatively to the following three issues: the channels through which exchange rate change influences agricultural export, the degree it affects the export and how to adjust policy.In addition to Chapter 1 Introduction and Chapter 6 conclusions and policy implications, the main content of this paper is divided into four chapters.Chapter 2 is the literature review on the effect of exchange rate changes on agricultural trade. This chapter exhaustively surveys the impact of exchange rate movements and the risk of exchange rate volatility on agricultural trade from the theoretical and empirical aspects with a brief review on theoretical conceptual framework, empirical model specification, estimation methods and other issues, then notes the possible direction of future research. The literatures review indicates that both the theoretical models constructed no matter from the micro and macro perspectives and the empirical results lead to the consensus: exchange rate fluctuations significantly have impeded agricultural trade flows. Chapter 3 develops a theoretical model that explains the impact of exchange rate change of RMB on China's agricultural product export. This chapter first constructs a basic model on export decision based on several assumptions then develops a basic model through relaxing assumptions from the supply angle. This model distinguishes from the existing model by what is following: under a certain demand function, it progressively expands the basic model with the introduction of some variables such as the exchange rate risk, imported input and technical barrier to agricultural trade, and finally forms a theoretical analytical framework relatively in accordance with current China's exchange rate and agricultural trade situation. The final model emphasizes the characteristics of agricultural trade and China as a developing country.The final theoretical model shows that the export volume of agricultural products is determined by the following factors: (a) nominal exchange rate level and exchange rate risk; (b) foreign consumer demand and foreign price level; (c) domestic and imported inputs costs of manufacturers; (d) agricultural technical barriers to trade. Theoretical model indicates that the elasticity of nominal exchange rate level, a key variable, is positive, which means the increase of nominal exchange rate level (devaluation) promotes the growth of China's agricultural export. The impact of exchange rate risk on export volume is not clear, may be positive, negative or no, which depends on the comparison of manufacturer's foreign exchange revenue of export to its expenditure of cost of imported inputs. Therefore, the trade effect of exchange rate movements relies on the net effect of changes of exchange rate level (appreciation or depreciation) and exchange rate risk.Chapter 4 describes empirical model specification and estimation methods and procedure. This chapter, based on more extensive survey of empirical literatures on trade effect of exchange rate movements, specifies GARCH model that measures the risk of exchange rate volatility and ADL to establish a complete empirical analysis framework. It also presents detailed empirical estimates steps and methods from unit root to cointegration test of data. Structure break in data generation process is introduced for unit root test, OLS estimation and cointegration test.Following empirical model specification and estimation methods and procedure described in Chapter 4, Chapter 5 examines the data of nominal exchange rate of RMB against Japanese yen, China's agricultural exports to Japan and others to reveal the impact of exchange rate movements of RMB against yen on Chinese agricultural exports to Japan. Detailed results on ADF unit root test, unit root test with structural break, exchange rate risk calculated by GARCH (1,1) model, and ADL regression with structural break dummy variables are reported and further discussed.The results show that the cumulative elasticity of exchange rate level variable is 2.78, indicating RMB devaluation against yen will promote export growth, while appreciation hinder export. The cumulative elasticity of the volatile risk of exchange rate, 64.75, indicates exchange rate risk positively stimulates agricultural exports to Japan. However, further analysis finds that, despite of the positive elasticity of exchange rate risk, its effect is much smaller than that of exchange rate level, the net effect of exchange rate movements has been dominated by the latter. Further analysis on monthly net effect shows, after exchange rate formation mechanism reform in July 2005, the dominant negative effect of continuing appreciation of RMB brings a negative net effect which has been becoming relatively smaller, meaning a relatively weakening barrier to export. But, during a longer period from exchange rate reform till now, the cumulative effect of RMB appreciation against Japanese yen with fluctuation has been increasing negative, indicating RMB appreciation still have impeded greatly China's agricultural export to Japan in the long-term.Therefore, the negative impact of RMB exchange rate movements on China's agricultural export should not be underestimated. It is very essential for the government to adjust its policy. Due to the difficulty of exchange rate policy adjustment, the government can start from agricultural policy adjustment to reduce or relieve the negative effect of exchange rate movements. According to the dominant negative effect of RMB appreciation, policy adjustment in short term is to further improve the support system of agricultural export so as to reduce the unit cost of agricultural export, The concrete policies, such as agricultural subsidies allowed by the WTO agreement, reduction of agricultural export inspection and quarantine fees, should be taken into consideration. While policy adjustment in long term lies in improving the quality and advancing technology, which will upgrade price competitiveness to quality competitiveness. More specific policies include increase of investment in research and promotion of advantageous agricultural products, promotion of good agricultural practices (GAP) and authentication of agricultural exports.In addition, special attention is paid to exchange rate risk. Although this paper finds that the risk of nominal exchange rate volatility positively affects agricultural exports to Japan, the possibility that the majority of small and medium manufacturers are risk aversion and will reduce export in the face of increased risk of exchange rate, can not be excluded because of the use of aggregate data. Thus, the government cannot neglect the stability of foreign exchange market and while closely concern about the impact of RMB appreciation on price competitiveness. Meanwhile, providing guidance and financial instruments of foreign exchange for risk aversive exporters is also important to minimize foreign exchange rate risk and maintain stable growth of agricultural export.