The Effect Of Real Effective Exchange Rate Movements On The Profitability Of Exporting Firms In China

Since the Chinese government abandoned the strict link of its currency to the U.S.dollar and refer to a basket of currencies in July 2005,RMB changed into managed floating exchange rate regime.In recent years,exchange rate reforms continued and financial system extensively developed in China.Experienced exchange rate reforms,RMB appreciated from 2005 to 2013,depreciated from 2014 to 2016,large exchange rate movements become often and unavoidable.Exchange rate movements impact exporting firms' profitability through a variety of passages.The enlargement of exchange rate movements not only provides potential extra profit,but also brings exchange rate risk exposure.Exporting firms face challenges in operating and risk management on the uncertain course of RMB.In the background of globalization and floating exchange rates,it is important to explore the effects of exchange rate movements on profitability of exporting firms in China.In this paper,we use China's 1999-2009 firm-level data in the manufacturing sector to investigate the effects of real effective exchange rate movements on the profitability of exporting firms.We review and summarize literature about effects of exchange rate movements on exports and firm performance.Based on the theoretical model of firm heterogeneity,an empirical specification is constructed.We include independent variables of real effective exchange rates,interaction term of real effective exchange rates and exporting ratio,firm productivity,domestic income level,foreign income level and dependent variables of profits.For the whole manufacturing sector,we first use OLS method,then in order to solve endogeneity problems,fixed effects and GMM dynamic model are introduced.Focusing on different manufacturing industries,we select 8 industries and estimate in GMM dynamic model.The final part is robust test,policy implications and conclusion.The results from OLS,fixed effects,GMM dynamic model show that RMB real appreciations have significantly negative effects on the profitability of China's exporting firms in general.But the negative effects seem to be greater for those exporting firms with relatively lower percentage of exports.the reason may be that high export ratio firms are more aware or able to manage exchange rate risk exposure.The effects of real effective exchange rate movements on the profitability of exporting firms in different industries vary.In addition,firm productivity,firm size,domestic and foreign income level also have significant impacts on the profitability of exporting firms.