Impact Of External Shock On Domestic Price

With the deepening of China's opening up, China's economy, on one hand, is becoming increasingly related with the global economy. On the other hand, suffering from external shocks is also growing. Since 2007, international crude oil prices, commodity prices and food prices went through violent fluctuation, which brought tremendous pressure to the smooth running of our economy. Since 2010, the global prices of raw materials and energy, in particular, took on a general rising trend. At the same time international commodity prices and the CRB index kept on increasing. Compared to the lowest price in early 2009, CRB index had increased at most by nearly 50% while the Brent crude oil prices rose by nearly 60% to the largest extent by April 2011. PPI and CPI index used to measure the domestic price level has also been rising. In the first three months of 2011 PPI rose by 6.6%,7.2% and 7.3% respectively on an annual basis when CPI rose by 4.9%,4.9% and 5.4% respectively on an annual basis. China as a country consuming large amount of raw materials and energy is inevitably affected.But what we should make it clear is one point:whether the external shock really affected domestic price.This paper will explore transmitted inflation from external shock, as common which we choose both the Brent oil index and CRB index. Based on the CRB index and Brent oil index,combined with the RMB exchange rate, this paper constructs the SVAR model to study the impact of external shock on China's import price index from January 2005 to December 2010,and then makes an analysis of the transmission of the external shock based on the import price index associated with price index of the upper reach, middle reach and lower reach, and finally goes on further to analyze this kind of release in our economic system under the background of the characteristics of the current price transmission. The empirical results show that:external shocks can be transmitted but not entirely to domestic prices through imports. The biggest shock comes from international commodity prices, followed by international oil prices, exchange rate last. In addition, China's price transmission has its own characteristics:the normal transmission occurs only in the middle and lower reaches, and peculiar phenomenon happens that prices of the middle and the lower reversely send the transmission to the upper prices; import prices really have no significantly transmitted effect on prices of the upper reach, middle reach and lower reach; on the contrary, other prices can send reverse transmission to the import price; Therefore, the release of external shocks appears not only in the form of the CPI increase, and other release form of external shock also deserve our due attention.In the foreseeable future, the U.S. will continue to pursue a loose monetary policy. The downward trend in the value of dollar in turn will lead to the increase of international oil prices and commodity prices. Given the limitations of the lower the flexibility of RMB exchange rate, it is difficult to adjust the exchange rate to hedge the impact of the depreciation of the dollar. As a result, such shocks will be transmitted to the domestic price system. Under the circumstances of price controls existing in China, apparent monopoly characteristics in the upstream and perfect competition in the midstream and downstream,the impact of external shock shows up partly in the form of the transmitted inflation in the economic system while there are even more likely to show up in the other ways. Because of the special market structure characteristics in the upstream and downstream:producers of domestic raw materials and energy characterized by monopoly while the downstream producers facing a very intensively competitive market structure, the downstream producers cannot do the same thing when the upstream monopoly producers can raise its prices at will. They have no choice but to suffer the adverse effects. With increasingly fierce competition, lower profits in the manufacturing sector has been gradually squeezed down, and furthermore the more low-end products, the lower their profit margins. Once unbearable, it will be followed by terrible results:probably resulting in overcapacity in the upstream and downstream businesses going bankrupt in large numbers. Rapidly rising unemployment across the country will ensue. National economy recession also follows subsequently. To make matters worse, it may trigger a retaliatory increase of the price index and promote the formation of stagflation situation.