Studies On The Effects Of RMB Exchange Rate Pass-through Into Export Prices In China

As a kind of external price for a currency, exchange rate is the most significant synthetic price index when the country is participating international economic activity. Under opening economy, exchange rate plays a role that carry conversion price out for foreign trade and international economic activities. It is an important economic lever as well. On July 21st, 2005, China announced a further move to reform its exchange rate forming mechanism, With a view to improving the managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. According to the publication of BIS, it is very obvious for RMB appreciation. From July 2005 to November 2008, the nominal effective exchange rate of RMB had appreciated 19.71% accumulatively, and the real effective exchange rate of RMB had appreciated 25.06% accumulatively. By means of analytical framework of traditional international economics, such a substantial appreciation of RMB will inevitable rise the price of Chinese export goods and lower the price of imports that would weaken the competitive strength of Chinese exports, and curb exports and promote imports. It is helpful for easing the imbalance in Chinese long-term external economic "double surplus" situation. However, the result is on the contrary. Accompany with rapid appreciation of RMB, the size of Chinese international trade continuously grows, and export volume and current account surplus continues to rise and breaks records again and again. Those phenomenon that traditional balance of trade theory could not explain needs to be read from some new angles. This paper is to do an in-depth study for the issue from an angle of incomplete exchange rate pass-through.Firstly, the dissertation puts forward the issue"the mystery of largely increased trade surplus against the backdrop of the appreciation of the RMB exchange rate"after exchange rate reform in July 2005. This is the backdrop and logic starting point of this dissertation. Secondly, it sorts literature at home and abroad that concerns the correlation theory and empirical study of the exchange rate pass-through. Third, on the basis of above, from the relationship between the exchange rate-the price mechanism and trade balance, the dissertation constructed theoretical analysis framework of incomplete exchange rate pass-through and changes in trade balance. Fourth, based on the dynamic description of changes in the RMB exchange rate, in Chinese foreign trade and economic growth after 1978 when the reform and opening-up strategy implemented, the dissertation reveal the inherent mechanism of the relationship between exchange rate fluctuations and macro-economic. Fifth, based on the analysis of influencing factors of RMB exchange rate pass-through, and from Chinese particular export trade terms and export markets structure, this dissertation constructed the theoretical analysis model which is depended by the RMB exchange rate pass-through into export prices. Sixth, the dissertation constructed the econometric model of the RMB exchange rate pass-through which is based on the analytical framework of cost markup theoretical model. And used the monthly data of January 2003 to November 2008, it makes five variables for establishment of the VAR model. The five variables are the pressures of foreign demand, the pressures of competitive in foreign markets, the cost of exports of domestic enterprises, RMB nominal effective exchange rate index and export prices index. Based on the stability tests, cointegration test and Granger causality tests to the variables, the dissertation made a estimate to the RMB exchange rate pass-through into export prices by means of VAR model; finally, it raise the important policy implications of incomplete exchange rate pass-through.The results of research show that: whether the exchange rate movements can affect the trade balance and the extent of this impact, depends primarily on the exchange rate pass-through. The size of exchange rate pass-through (mainly for incomplete exchange rate pass-through) is essential to the analysis of the link between exchange rate and the real economy. The export market structure and the way of export trade in China is the influencing factors of RMB exchange rate pass-through elasticity into export prices. Here, we consider the increase in export prices is caused by one unit of the currency appreciation. So we got something like this: the more the structure of export market close to a state of perfect competition (that is, firms with a smaller ratio of the marginal cost markup), the smaller the increase in export prices is ;the greater the share of the domestic exporter in the international market is, the bigger the increase in export prices is; the greater the proportion of the export processing trade in domestic exports , the smaller the increase in export prices is. The Chinese export enterprises have some features like: a large number, small-scale and dispersed. In addition, most of these enterprises lack core technology and independent brands. They rely mainly on the comparative advantage of labor costs in "OEM", "original equipment manufacturer" and other production in low-end part of the value chain. Furthermore, their degree of dependence on the international market is high and their market concentration is low. While, there are widespread excessive competition and low-price competitive in the export markets. In the international market, Chinese export enterprises lack market power and bargaining power seriously. In face of adverse changes in the RMB exchange rate, it is difficult for the export enterprises to increase export prices, in order to make the costs pass on the way out. But in order to maintain the market share, they have to sacrifice profits to absorb the adverse currency impact of the appreciation. Therefore the exchange rate pass-through into export prices of RMB is very low. The results from the empirical analysis shows, the nominal effective exchange rate of RMB shocks on Chinese export prices. While the impact of this shock having a certain degree of statistical significance, but it is a very small impact. So exchange rate pass-through effect is time-lagged and incomplete. One percent positive shock of the RMB exchange rate (that is, the appreciation of the RMB) will lead to export prices rising slightly slow. We can see it has increased 0.0054 percent after 5months, up to 0.07 percent after two years, which is the maximum value. And then it stabilized and has remained at this level.This lower exchange rate pass-through of RMB not only provides a reasonable explanation for"the mystery of largely increased trade surplus against the backdrop of the appreciation of the RMB", but also provides a new policy meaning for several macro problems China faces on the current. First, a slight and gradual principle of appreciation of the RMB should be followed. And a sharp appreciation of the RMB in a short term should be avoid; RMB appreciation should be maintained in such an economic environment where the inflation is stable or low; the RMB exchange rate should keep stable in a short time; Second, we should promote the development of the export trade from quantity type to quality and efficient type, it should extents to the two ends of the smiling curve, and be into the high-end value chain. Third, the way of economic growth should be from the export-driven growth pattern to domestic demand-led growth pattern, we should coordinate the balance among export, investment and consumption. Finally, Chinese central bank has the space and freedom to make and implement the independence monetary policy. And we can consider implementing a more flexible exchange rate system.