Analysis On The RMB Exchange Rate Movements And The Development Of Processing Trade

As one of the most important mode of trade in China, Processing trade plays an important role in promoting China's economic development, creating jobs and maintaining the international balance of payments. However, due to the international financial crisis, the RMB appreciation and the impact of previous monetary policy, China's processing trade industry has been facing lots of difficulties since the second half of 2008. As an important international economic activity indicator, the exchange rate has an important impact on a country's foreign trade. This paper offers an analysis of the impact of long-term changes trends and short-term fluctuations of the RMB exchange rate on processing trade, and then discusses the decision mechanism of RMB exchange rate and the transformation and upgrading of China's processing trade based on the forward analysis.With the data of Chinese quarterly economic data (2001-2008), this paper adopts co-integration and error correction models to analyze the impact of RMB exchange rate on the total amount of China's processing trade and the major categories commodities of processing trade.The results of long-term analysis show that:Among China's total amount of processing trade, the RMB real exchange rate and the trade-weighted GDP of the relative country, there exist a long-run equilibrium. The impact of the RMB exchange rate on the major categories commodities of processing trade is relative to the products cost structure:the higher the proportion of imported costs in the products, the larger the impact is; and on the contrary, the higher the proportion of processing costs, the lower the impact is.The analysis of short-term fluctuations'impact shows that:the RMB exchange rate fluctuations affect the current and post-processing trade balance. But its impact on different categories of products is more complex. Not only a larger difference between the values of elasticity coefficient exists, but also the direction of change may appear different. On some products like rubber products, base metals and goods made by those materials, which have a higher proportion of imported costs, the RMB exchange rate fluctuations' impact is significant and strong. But on products like textile, which has a stronger ability to adjust the costs, the impact is not significant. In addition, some products like mechanical and electrical products, which have longer production cycle and higher technological content, can withstand the fluctuations'risks better. The fluctuations'impact has a time lag on those products.The estimation of Error-correction model provides following conclusions. The first result is that China's processing trade has a stronger ability in short-term adjustment, when meeting short-term disturbance, it can return to long-term equilibrium faster. To some extent, industrial scale advantages can resist the impact of exchange rate risk. Moreover, the fluctuations of current trade-weighted GDP of the relative country has a significantly impact on the processing trade. The findings also show that the impact of relative country income fluctuations relates to the use of the industry, the production cycle and the income elasticity of different categories of goods.Finally, the paper gives some advices about the reform of RMB exchange rate formation mechanism and the development of processing trade. In the reform of RMB exchange rate formation mechanism, the market-oriented reform is an inevitable trend, but its pace must take account of the capacity of the relevant economies, including the processing trade enterprises. Meanwhile, the processing trade enterprises must actively achieve industrial upgrading, continuous self-improvement, to enhance the ability to resist exchange rate risks.