Exchange Rate Movements And The Profitability Of Export Firms In China

Since the reform of RMB exchange rate formation mechanism in July 2005, yuan’s trading band becomes widening, which caused a sustained shock on the export firms’ profitability. Especially after June 2008, the RMB started appreciating again. Beyond that, the weaker external demand, rising costs, credit contraction and a series of unfavorable factors reduced China’s export growth rate,and squeezed the export margins, so many export firms went blunt. Meanwhile, the problems existing in export firms themselves, such as low-price competition, limited ability of bargaining, insufficient financing ability and low-level of exchange rate risk management skills exacerbated the adverse effects of exchange rate shock. As for the cause of the low profitability of the export firms, we must carry out a comprehensive study from both of external factors and internal factors. In addition, there are differences impacts of exchange rate shocks among export firms in different industries, different size, and different forms of ownership. As for the reason of the difference, it is also worthy of our consideration.The continuous declin of export profit margins reflects the inability and inefficiency to create profit in export firms, which will affect the overall export competitiveness eventually. Therefore, if we can study the impact of exchange rate on export firms in a full, deep, and systematic way, in order to explore the path for the export firms to improve their own profitability, and put forward the feasible policy suggestions, it will be especially important not only to promote the transformation and upgrading of China’s foreign trade, but also for the eventual realization of the China dream from an "exporter" to be an "export powerhouse".In this paper, I use both of qualitative analysis and quantitative analysis methods, mechanism analysis combined with empirical analysis and comparative research methods, to study the mechanism and effect of exchange rate shocks. First of all, I try to study the moving trend and characteristics of the RMB exchange rate, as well as its impact on China’s export through the qualitative analysis methods. On that basis, I use some frotier econometric analysis methods, such as instrumental variables, panel threshold model, propensity score matching, two-tier stochastic frontier model and heterogeneity stochastic frontier model for quantitative calculation, which provides the data support for the study in relative fields. Secondly, I develop the traditional firm heterogeneity theory appropriately and give a profound analysis on the mechanism of the impact of exchange rate shocks. Based on this evidence, I study how these factors, such as productivity heterogeneity, financing constraints, foreign exchange derivatives market, bargaining power affect the profitability of the export firms, and calculate the loss of the profit efficiency. Finally, I do comparison research in horizontal and vertical way, and between similarities and differences, in order to find the key factors affecting the export profitability and explain why exchange rate shocks to different types export firms differs.This paper mainly studies the effect and mechanism of exchange rate shocks to the profitability of export firms, and find the intrinsic factors. The whole thesis can be divided into four parts with nine chapters.Chapter 1 is the first part. It is the introduction of the paper, which mainly introduces the background, significance, ideas, content, methods, innovations and shortcomings of the research.Chapter 2 is the second part. It is the literature review about previous relevant research at home and abroad on how the exchange rate shocks to the profitability of export firms, productivity heterogeneity theory, financing constraints and export firm behaviors, foreign exchange derivatives, and how export firms pricing, in order to provide reference for the subsequent analysis of this paper.The third part includes chapter 3 to chapter 8, which research on the proposed questions from different perspectives, and it is the core part of this paper. The main contents of each chapter are as follows:Chapter 3 study the trend of the RMB exchange rate changes from the macro perspective. In this chapter, I review the reform of the RMB exchange rate formation mechanism firstly, which including the content and effect of the reform and the characteristics of exchange rate changes in the preliminary reform stage, further perfecting stage, international financial crisis stage and restart stage. It is the foundation for the following microcosmic study.Chapter 4 explains the difference of exchange rate shocks on the different export firms from the perspective of productivity heterogeneity. In this chapter, I analyzes applicability of the productivity heterogeneity theory in our country firstly. Then I add the real exchange rate into traditional productivity heterogeneity model, and study the export profit forming mechanism in an open economy environment, as well as the exchang rate shocks on the export profitability. Finally, I do an empirical study on the effect of exchange rate changes by using instrumental variable method, and I also study the difference of exchange rate shocks on the export firms with different productivities by means of grouping test.Chapter 5 explains the difference of exchange rate shocks on the different export firms from the perspective of financing constraints. In this chapter, I analyze the endogenous financing constraints and exogenous financing constraints existing in China’s listing corporations firstly Then I study the nonlinear relationship between exchange rate changes and export profit due to financing constraints by means of panel threshold model.Chapter 6 studies the effect of using foreign exchange derivatives to hedge exchange rate risk for the profitability of export firms. In this chapter, I introduce the development of RMB foreign exchange derivatives market firstly, then I analyze the effect of foreign exchange derivatives for export revenue and export profit by using propensity score matching method, and I also study the differences on the using effect of foreign exchange derivatives between state-owned firms and non-state-owned firms from the ownership perspective.Chapter 7 studies the bargaining power of export firms in international market. In this chapter, I study the effect of bargaining behavior for the profitability of export firms by building the bargaining behavior model between import and export firms in the international market under the condition of asymmetric information. Beyond the theoretical analysis, I further quantitatively estimate the bargaining power of Chinese exporters by using two-tier stochastic frontier model. Furthermore, I study the factors that may influence the export bargaining power, such as the industrial concentration, exchange rate, the cost of export commodities, the quality of export commodities, the prices of competitors commodities and so on.Chapter 8 is the quantitative research of profit efficiency loss in Chinese export firms. In this chapter, I estimate the profit efficiency loss index by using heteroscedastic stochastic frontier model. Furthermore, I analyze the relative importance of the factors that may influence the profit efficiency loss, such as productivity heterogeneity, financing constraints, foreign exchange derivatives, the bargaining power and other factors, which have been mentioned from chapter 4 to chapter 7, with standardized regression.Chapter 9 is the fourth part, which includes the conclusion and policy suggestions. This chapter shows the main conclusions of the paper, and puts forward the corresponding policy suggestions on how to improve the internal management and the external environment for the export firms.This paper draws the following conclusion:Firstly, exchange rate shocks have negative impact on the profitability of export firms, but the impact is limited. My research finds that the export firms seldom adjust their export prices completely according to exchange rate changes, but often adjust their cost plus, so as to absorb the exchange rate shocks in a certain extent. Consequently, exchange rate can influence the profitability of export firms. But exchange rate has little effect on the whole export profit margins, and the effects are different among different firms, which is related with firms productivity, financing constraints, foreign exchange derivatives, bargaining power and so on.Secondly, productivity heterogeneity can influence export profit rate and its sensitivity to exchange rate shocks. The productivity not only has obvious decreasing marginal positive effect on export profit rate, but also can reduce its sensitivity to exchange rate shocks.Thirdly, financing constraints can influence the tolerance of export firms to exchange rate volatility. The relation between exchange rate and export profit rate is nonlinear, which is determined by financing conditions. The financing constraints problems, which are universally existing in Chinese export firms, have exacerbated the adverse effects of exchange rate shocks.Fourthly, it is less useful to improve the performance of export firms by using foreign exchange derivatives. Although the use of foreign exchange derivatives can improve enterprise’s export income in a certain extent, but it fails to improve export profits significantly. What’s more, the efficiency of using foreign exchange derivatives to hedge exchange rate risk is weaker for state-owned firms than non-state-owned firms.Fifthly, bargaining power has a significant impact on the formation of the final export price. China’s export commodities prices are substantially lower than the benchmark price, which is due to the lack of bargaining power. Bargaining power is mainly related with the factors about firms themselves, and is not significantly influenced by the exchange rate.Sixthly, there are serious profit efficiency loss existing in the export firms in China. The actual export profit rate is far below its optimal level. The ownership, production efficiency, popularity and selling expenses have important effect on the profit efficiency loss. In contrast, the effect of exchange rate is very limited.In this paper, I do both of macro analysis and micro analysis, but mainly based on micro perspective. That is, I study the impact of exchange rate shocks on the profitability of export from the firms data. In the study, a lot of frontier econometric methods are used. So I can do the quantitative research on some issues which are usually researched in qualitative way, which not only provides empirical supports for the relevant research areas, but also propose some ideas for the further research. However, I only choose domestic listing companies as the research samples and many theoretical assumption cannot be verified through empirical analysis because of the restriction in data, so we need further research to test the applicability of the empirical results in this paper. Due to my weak economic theories, I focus too much on the econometric analysis, but put less attention to the mechanism analysis of exchange rate shocks. The aboving mentioned problems are not only the defects in my research, but also the direction of further researches.