The Impact Of RMB Exchange Rate Transmission On International Trade

Since China became a member of WTO in2001, economic and trade development has been accelerated apparently, which contributes to large trade surplus and foreign exchange reserves by now. In July2005, Renminbi (RMB) exchange rate turned to follow the trend of a basket of foreign currency instead of US Dollar, subsequently it has achieved a large range of growth. China’s current economic situation is similar to the Japan in the1980’, while the lessons of Yen revaluation should not be ignored. During the period of RMB appreciation, it is worth study in RMB exchange rate volatility, especially its impacts on economic and trade development.In this paper, we initiate research on RMB exchange rate pass-through based on empirical evidence from Shanghai, by applying VAT model to estimate PT relationship for Shanghai’s bilateral trades with three major trading partners——United States, European Union and Japan during2006-2011period, a time after policy changing of RMB exchange rate, bilateral real effective rates——RMB to US dollar, RMB to Euro, RMB to Yen exchange rate being used accordingly. The goal of the paper is to examine the degree and dynamics of pass-through of RMB exchange rate volatility to trade flows.Empirical results indicate that the impacts of RMB depreciation on all patterns exports to and the imports under processing trade from United States are significant, while effects of exchange rate appreciation in ordinary imports from United States are quite small. During the same period, RMB exchange rate volatility is weakly correlated with the exports to and the imports from European Union, except pass-through elasticities for ordinary imports are comparatively higher according to product differentiation. The performance of pass-through in Shanghai-Japan trades is quite different from above, where both RMB depreciation and revenue increase have negative impact on the exports to Japan.The paper concludes that observed pass-through is more significant in export than import in general, varies quite substantially across trade patterns, depends on market structure and product categories. In summary, RMB appreciation is not an effective resolution in resilience of trade imbalances for China as well as the world.