Imports, Product Quality and Export Price Exchange Rate Pass-through, a paper co-authored by Wang Yaqi, a teacher from our school, and Professor Yu Miaojie from Peking University, is officially accepted by China Economic Quarterly for publication.
This paper uses customs data about enterprise-product transactions in 2000-2011 to reexamine the effect of movements of RMB exchange rate on export prices. The result shows that the exchange rate pass-through of Chinese exports prices was 93%, which means for 1% change in the RMB exchange rate, the change in export prices denominated in RMB was around 7%. By looking at the relations between imports, product quality and export prices, the paper explains the phenomenon of export prices approaching complete exchange rate pass-through. It follows from this that: This phenomenon arose from the high propensity of Chinese exporters to import intermediate goods and notable quality improvement during the sampling period; while the behavior of importing intermediate goods affected the prices of Chinese exports in two respects: On the one hand, exchange rate movements affected the production cost of exporters that imported intermediate goods from the same country, namely the “marginal cost channel”; on the other hand, as the costs of imported intermediate goods were lowered, exporters could choose a wider range of categories and purchase higher-quality intermediate goods, thereby boosting the quality and prices of exports, namely the “quality improvement channel”.
The research mentioned in this paper has provided new references for how to understand the effects of exchange rate policies in recent years and how exporting enterprises respond to exchange rate movements. In the past, some views held that low quality of China’s exported products or low productivity of exporting enterprises was the main reason why our export prices approached complete exchange rate pass-through. However, by probing into the trends of the quality of Chinese exports and importing behaviors, this paper finds that the quality of our exports rose obviously during the sampling period, which significantly weakened the effect of exchange rate on the cost of imports. During 2004-2011, the RMB exchange rate maintained a rising trend. The paper finds that despite the disadvantage of cost competitiveness caused by the appreciation of RMB to exporting enterprises, Chinese exporters enhanced product quality by importing more and higher-quality intermediate goods and maintained relative stability of the prices of exports denominated in RMB during the appreciation process. It is also found that as RMB appreciated, decreases in the volume and amount of exported products with obvious quality improvement were apparently small. In this sense, how exporting enterprises can successfully transform the pressure of RMB appreciation into the motivation to upgrade product quality is a crucial task for Chinese manufacturing to maintain competitive advantages in the world markets in future.
