The Asymmetric Effect Of RMB’s Exchange Rate Volatility On China’s Exports

In recent years, the RMB exchange rate formation mechanism keeps reforming. First, RMB stopped pegging to USD, then, Chinese government applied the expantion of the volatility of RMB exchange rate. The range of the volatility of RMB to USD exchange rate has expanded from 0.3% to 2% from year 2005 to 2014.With the fast change of domestic and international economic and financial situation, it is obvious that the fluctuation of RMB exchange rate would be a normal behavior, and the fluctuation of RMB exchange rate would be more and more active in the future. China as the largest trading country in this world, under the situation that the fluctuation of RMB exchange rate becoming a normal behavior, it is necessary to research the relationship between the volatility of RMB exchange rate and China’s exports.Based on the hypothesis that the volatility of exchange rate has asymmetric effects on exports, this paper research the relationship between the volatility of exchange rate and exports in three ways. The first part using the time series of the exports of China to the US and the European Union and Japan, analyzing the time series with the method of co-integration and ECM model, the results show that in the long term, the volatility of the exchange rate of RMB has significant effects on the exports of China to the US, while it doesn’t show the significant effect on the exports of China to the EN and Japan. In the short term, the volatility of the exchange rate of RMB has significant adjustment effect on the exports of China to Japan.The second part of this paper using bilateral exports from seven different countries to China date from 2000/8 to 2014/8, utilizes panel data regression model, tests the hypothesis that the exchange rate risk(volatility) has asymmetric effect on exports, which means that exchange rate risk affects exports differently during appreciations and depreciations. The results show that depreciations have positive effect on exports while appreciations have the negative one. The exchange rate risk affects export in negative way, the asymmetric effect exists significantly, which means that during depreciations, the exchange rate risk expands the negative effect, and during appreciations, the exchange rate risk reduces the positive effect. Beside, foreign income has positive effect on exports. Thus, policy makers can consider the stability of exchange rate addition to its depreciation as a method of controlling exports growth.Considering the import role which the USD plays in international trade and the weight which USD has on the RMB’s foreign currency basket. The third part eliminates the American data on the panel data of the second part, and add the control variable which is the volatility of the exchange rate of RMB to US dollars to test whether the volatility of the exchange rate from a third country would has some explanations on the exports of China to the other countries. The results show that the volatility of the exchange rate of RMB to US dollars also has significant effects on the exports of China to the other countries, and the asymmetric effects also exist significantly. This results also test the stability of the asymmetric effects of RMB exchange rate volatility which we test in the second part. Considering that USD works as the international currency, it is not very hard to understand that the volatility of the exchange rate of RMB to USD has a significant effect on China’s exports. Thus the policy makers should take the volatility of the exchange rate of RMB to USD into consideration and when they make policies about international trade and put the weight of USD on the tool of the basket of currency.