Does the RMB appreciation affect China's Export competition?

Purpose: The motivation for this study was the Chinese government's announcement of the RMB's appreciation on July 21, 2005, and its aim was to ascertain whether that appreciation has affected China's export prices by empirically measuring the degree of the exchange rate pass-through on those prices. Research design, data, and methodology: Using 73 HS trade categories with cross-industry and time-series data from July 2005 to January 2009, the panel estimation of a fixed-effects model has been applied to measure the degree and stability of any exchange rate pass-through effects. The estimation results show that the export prices of most of the trade categories were affected by the exchange rate changes. The pass-through effect was generally small, at about -0.485, and statistically significant in most of the export prices. Results: The empirical results of this study indicate that, in the long run, China would lose its export advantage and competitiveness if the RMB were to continuously and rapidly appreciate, because its export goods would no longer operate under strong monopolistic competition. At the same time, the expansion of China's export trade is squeezing the markups of the country's exporters. These exporters therefore need to re-think their export pricing strategy and determine whether they want to keep their market share and remain competitive, but sacrifice their markups and profit levels. Conclusions: The implications for China's exchange rate policy suggest that it would be better for the RMB to appreciate slowly and gradually rather than radically. It is also clear that it would be in China's overall economic interest to allow freer flows of capital to reduce the pressure on the continuous appreciation on the currency and pave the way for improvements in export competitiveness and profit margins.