Study On Industry-specific Effective Exchange Rates Of RMB

Since the RMB exchange rate regime reformed in July2005, RMB exchange rate has experienced a long-term and sharp appreciation. Until the end of January2014, the bilateral exchange rate of RMB against the U.S. dollar has appreciated by35.6%, the RMB nominal effective exchange rate (hereinafter referred to as "NEER") and real effective exchange rate (hereinafter referred to as "REER") published by the Bank for International Settlements (BIS) has also appreciated by31.3%and42.6%respectively. The impacts of the sharp appreciation of the RMB on China's economy especially on the exports received widespread concerns. However, before analyzing the impacts of the exchange rate appreciation, we must firstly determine which indicator can accurately define the external value of RMB, the RMB/US dollar bilateral exchange rate or the RMB NEER and REER?When analyze the impact of exchange rate on a country's aggregate economic variables, such as the total export volume, export price, trade balance and so on, the aggregate effective exchange rate(hereinafter referred to as "EER") maybe a reasonable indicator to reflect the export competitiveness, as the EER is a weighted average of the bilateral exchange rates against the major trading partners. However, when the analysis are based on the perspective of industry level instead of national level, can the aggregate EER also be a reasonable indicator? This dissertation argues that the weights of trade partners in the aggregate EER are based on all imports and exports of a entire country, so they can not accurately reflect the importance of each trade partner in different industry. And moreover, the price indices used in aggregate REER to deflate the bilateral nominal exchange rates, such as CPI and PPI, only reflect a country's aggregate price level and omit the industry-specific distinctions. As a consequence, when discussing the relationships between exchange rates and the industry-specific export volume or export price, aggregate EER may be less effective than industry-specific EER, in which the weights of trade partners are base on industry-specific exports or(and) imports, and the price indices for deflating are also industry-specific.In this dissertation, I firstly construct the industry-specific NEERs and REERs of RMB, and then analyze the differences between EERs across industries and the reasons causing these differences, for example, the impacts of major international currencies on industry-specific NEERs and the impacts of nominal exchange rate, domestic and foreign price level on REER of each industry. Finally, using the industry-specific NEERs and REERs, I analyze the impacts of RMB exchange rate on the export volume and export prices of China's major manufacturing industries.This dissertation consists of seven chapters, the main contents and structural arrangement are as follows:Chapter one is an introduction. This chapter mainly elaborate the research background, research significance, research methods and the innovations of this dissertation.Chapter two is an literature review. This chapter mainly review the theories and existing researches on effective exchange rate, especially on RMB industry-specific EER, and then point out the differences between this dissertation and the existing researches.Chapter three firstly constructs the industry-specific nominal effective exchange rates for China's20industries under Harmonized System, and then analyzes the discrepancy of NEERs across industries. The results show that: Although the moving trends of NEERs are nearly the same, there are apparent differences in mean value and amplitude of variation between each other. And then, this chapter analyzes the relationships between industry-specific NEERs and the major currencies(US dollar, Euro and Japanese yen) as well as the changes of the relationships with time.Chapter four mainly surveys the fact that could the industry-specific NEER reflect the export competitiveness of each industry more accurately, by comparing the powers of aggeregate RMB NEER published by BIS and industry-specific NEERs constructed in this dissertation on interpreting the effects of exchange rate fluctuations on exports of specific industries. And then, this chapter analyzes the relationships between industry-specific NEER and export prices of specific industries.Chapter five firstly constructs industry-specific REERs for China's8most important industries, basing on industry-specific price level and weights calculated with industry-specific export value. On this basis, this chapter analyzes the impacts of nominal exchange rate, domestic and foreign price level on REER of each industry by conducting a simulation analysis. The results show that:the appreciation of RMB nominal exchange rate is the main factor causing the appreciation of industry-specific REERs. On the contrary, the decrease of the relative level of domestic and foreign prices to some extent restrains the appreciation of industry-specific REERs.Chapter six analyzes the dynamic relationships between each industry's export volume and the factors of which the industry-specific REERs are composed, such as nominal exchange rate, domestic and foreign price level, basing on a SVAR model. The impulse response results show that:Because of the discrepancies in export structure and in competitiveness in international markets, the export volume of different industry will exhibit different response to a same sort of economic impulse.Chapter seven is the summary, and the1outlook for the future research.The main conclusions of this dissertation are as follows:1. The moving trends of industry-specific NEERs and REERs are nearly the same, but there are apparent differences in mean value and amplitude of variation between each other.2. For all of the NEERs, the US dollar/RMB exchange rate is the most key factor, but it's effects lowered after the2008global financial crisis. Therefore, it is reasonable for People's Bank of China to treat the US dollar as the main reference currency in RMB exchange rate management. However, the weight assigned to US dollar should be constantly adjusted according to the degree of influence of US dollar on China's export competitiveness.3. The industry-specific NEERs and REERs can reflect the export competitiveness of specific industries more accurately.4. For most of the industries, the RMB exchange rate fluctuations can not completely pass-through to the export prices except the precision instruments industry.5. In the face of the appreciation of RMB nominal exchange rate, China domestic producers can only lower the relative price of domestic and foreign goods to maintain its competitiveness in the international market. This reflect the situation that, because of lack of technical content and added value, most of the export products of China can only rely on the cheap price to compete in the international market, and also indicate that it is the only way to change the mode we competing in the international market that transform and upgrade the industrial structures.6. The impacts of nominal exchange rate, domestic and foreign price level on export volume are apparently different across industries. Therefore, more attentions should be paid to the differences between industries in the industrial and exchange rate policy making, in order to let the policies more targeted.The innovations of this dissertation:1. For the first time systematically calculated the industry-specific effective exchange rates of RMB, and analyzed the differences of EERs across industries.2. Using the industry-specific price indices instead of the aggregate price indices to deflate the bilateral nominal exchange rate in the industry-specific REERs calculating.3. For the first time quantitatively analyzed the impacts of major international currencies, such as US dollar, Euro and Japanese yen, on NEERs of specific industries.4. Analyzed the impacts of nominal exchange rate, domestic and foreign price level on REERs of specific industries, by conducting a simulation analysis.5. When analyzing the relationships between industry-specific REERs and export volume of specific industries, I decompose the REER into three variables, such as NEER, domestic price level and foreign price level, so as to investigate the impacts of the factors of which the industry-specific REERs are composed on each industry's export volume.The deficiencies of this dissertation:1. In the effective exchange rates constructing, the weights of trade partners are calculated in "bilateral trade weighting" scheme instead of "double-weighting" scheme, as a result the competition with trade partners in the third market is not taken into account.2. Due to lack of data, China's exports of all the industries that take the form of Hong Kong's re-export are considered as direct exports to Hong Kong, therefore the weights calculated are somewhat imprecise.