Demonstration Research On RMB’s Foreign Exchange Rate Pass-Through Into China’s Export Prices

Exchange rate plays an very important role in a country’s development of international trade.It is an important factor affecting the production costs and the prices of export goods.The influence of exchange rate pass-through is an Important research topic.Since2005in which reform for the formation mechanism of RMB’s Foreign Exchange Rate has been more market-oriented, Both the Nominal and Real Effective Exchange Rate of RMB have been rising continuously and sharply. According to the classic trade balance theory, this will result in relative export prices adjustment with import prices denominated in local currency decrease and export prices in foreign currency increase and thus depressing exports and encouraging imports which through the Expenditure Switching Effect, reducing China’s huge trade surplus and improving China’s internal and external imbalance. But facts contradict the theory. China’s trade surplus increased sharply from$31.98billion in2004to$101.88billion in2005and since then China’s trade surplus has been experiencing rapid growth in large-scale. There really is the paradox of trade surplus accumulation with RMB appreciation which this dissertation tries to explain from the view of Foreign Exchange Rate Pass-Through.To explain the paradox, We’ll found some correlation through analyzing the relationship between the RMB exchange rate and exports prices. Through the mechanism analysis based on market structure theory and an exchange rate pass-through model,there is a phenomenon of incomplete pass-through and it is affected by the target market elasticity of demand and exporters’ pricing capability. After series analysis based on monthly data of exports prices amd the RMB exchange rate,the thesis draws a conclusion that the phenomenon of incomplete pass-through also is found in China’s exporters. The thesis constructs a industry panel data to make empirical analysis and concludes that the impact of the exchange rate is different in various industries. In general,the degree of impact is deeper on industrial products than primary products.and deeper on the key target markets than others.There are some reasons to explain the phenomenon, in short-run, the fundamental principle for China’s Foreign Exchange Rate and trade balance policies should keep RMB stable and avoid sharp appreciation to ensure the growth of trade and GDP. At the same time, the government should make the RMB convertible under capital accounts gradually and cautiously. Second, the core of our trade policy should be to transform the economic growth mode, improving the bargaining power of importers and exporters. The third is to deepen the reform of the RMB exchange rate regime to enhance the RMB exchange rate flexibility.