Studies On RMB Exchange Rate Pass-through To Chinese Export Price Of Apple Juice

Since July21st，2005when China announced a further move to reform its exchange rateforming mechanism, the exchange rate of RMB becomes more flexible and changes morefrequently. And Since then, the exchange rate of RMB gradually steps into a period ofappreciation. According to the publication of BIS, it is very obvious for RMB appreciation.From July2005to December2012, the nominal effective exchange rate of RMB hadappreciated21.07%accumulatively and the real effective exchange rate of RMB hadappreciated29.6%accumulatively, based on the weight of trade and a basket of currencies.Because of the largest planting proportion and the most output, as a result, apple juice haslong been one of the important exported agricultural products in China. Its volume of exporthas reached788400tons and the value of export has reached$747million in2010. However,Chinese apple juice industry is export-oriented and the degree of dependence on foreign tradehas exceeded90%in recent years. Consequently, the appreciation of RMB will pass-throughto Chinese export price of apple juice that would affect the development of Chinese applejuice industry. With the severe domestic inflation、the depression in international market andthe fierce competition, the export of Chinese apple juice face severe challenges in recent years.Therefore, to improve the competitiveness of Chinese apple juice and reduce the risks fromthe appreciation of RMB，it is important to study the problems which China confronts with inexport of apple juice from the level of market.The paper studies on RMB exchange rate pass-through to Chinese export price of applejuice based on the theories of incomplete competitive market. Firstly, the paper defines theconcept of exchange rate pass-through and summarizes predecessors’ relevant theory andresearch. Secondly, the paper reviews the changes of RMB exchange rate system. Meanwhile,the paper analyses the situation of Chinese export of apple juice from two aspects of size ofexport and structure of export. On the basis of above, the hypothesis about exchange ratepass-through into Chinese export of apple juice is proposed. Thirdly, the paper constructed theVAR model of the RMB exchange rate pass-through which is based on the analyticalframework of cost markup theoretical model. The VAR model contains six variables and thesix variables are the export price of apple juice, RMB nominal effective exchange rate index, raw material costs, labor costs, the demand of foreign market, the pressure of competition.Based on the stability tests, co-integration test and Granger causality tests to the variables, thepaper made an estimate to the RMB exchange rate pass-through into export prices of Chineseapple juice by means of Impulse response function.The results from the empirical analysis shows, the nominal effective exchange rate ofRMB shocks on Chinese apple juice export price. While the impact of this shock having acertain degree of statistical significance, but it is a very small impact. So exchange ratepass-through effect is and incomplete. According the impulse response function analysis, Onepercent positive shock of the RMB exchange rate will lead to export prices of Chinese applejuice rising up to2%.That is, the flexible of RMB exchange rate pass-through into exportprice of apple juice is as high as2%and export manufacturers absorb as much as98%ofappreciation of the RMB the by adjusting their profit. The change tendency of the RMBexchange rate pass-through shows, the appreciation of the RMB will not affect the exportprice of Chinese apple juice in two phases, which reflects the time-lag effect of the RMBexchange rate pass-through. It is in period8that the appreciation of the RMB has the maxinfluence on the export price of Chinese apple juice. Since then, the RMB exchange ratepass-through tends to be stable, which means the apple juice manufacturers in China havegone through the transition period of the appreciation of the RMB and have adopted theinfluence of appreciation of the RMB. According to variance decomposition, we find that thefactors of foreign demand and competitive price play the most important role in explainingthe variance of Chinese apple juice export price, and the cost follows. RMB nominal effectiveexchange rate index has the worst explanation for the variance of Chinese apple juice exportprice, which indicates the exchange rate of RMB the RMB exchange rate on the export priceof apple juice is very limited.