On Incomplete Pass-through Effect Of Exchange Rate In Chinese Textile Foreign Trade

This paper studies the incomplete exchange rate pass-through effect on textile industry from the aspect of exchange rate impact on the prices of textile imports and exports. Due to the variation in the effects of exchange rate changes on different industries’ imports and exports prices, this paper first figures out the nominal effective exchange rate for China’s textile industry on the basis of trade share and analyses its differences. Then the paper points out the asymmetry of incomplete exchange rate pass-through effect and its causes, testing the effect on China’s textile industry, on the basis of panel data and field studies.Research findings:1. Like the official RMB nominal effective exchange rate index, the nominal effective exchange rate of textile industry imports and exports calculated in this paper based on weighted trade share shows the same rising trend, but also there are differences between the two indexes. The reason lies in that the changing of textile industry structure differs from that of overall industry structure, which leads to sharply different shares in the nominal effective currency basket for various trade partners.2. There is incomplete exchange rate pass-through effect in China’s textile import and export trade, and asymmetry is apparent. This can be seen from the fact that the absolutes of exchange rate pass-through coefficient for textile import and export trade are both less than 1, and the absolute of import’s exchange rate pass-through coefficient is bigger than that of export trade. Secondly, because the absolute is less than 1, there exists asymmetry between the effects of exchange rate appreciation and depreciation on exchange rate pass-through. The result depends on sign of exchange rate pass-through coefficient.3. China’s textile industry lies at the low-end of global textile industry chain, and the exports are mostly at the low-end and labor intensive products, which are poor in differentiation and have high price elasticity of demand. If the industry put up the price, it would have lost most of its order. In order to maintain their market share, China’s textile companies choose to keep the advantage of low price through actively absorbing most exchange rate floats. Because the imports of China’s textile companies are mostly textile raw material, high-grade fiber, clothing fabrics, advanced crafts and core techniques, and the government implements quota management on the above-mentioned products, the textile companies can’t make full use of foreign low-cost materials under the condition of RMB appreciation. On the other hand, the pricing rights of high-grade textile raw materials are in the hands of foreign exporters, China’s companies can’t benefit from RMB exchange rate appreciation. In summary, Chinese textile companies can’t eliminate exchange rate risks through adjusting import and export actively.4. It is found in the field research that textile companies’ heterogeneity decides the variation in their foreign market structure. As their partners change, the textile companies’ foreign market structure also changes, which is exemplified in their rising volume with developing countries. This trend is good for Chinese textile companies to enhance the speaking right and to manage exchange rate risks actively. But unfortunately, the present proportion of international trade paid in RMB is still at a low level, and the trade with developed and developing countries is mostly done with US dollar or the trade partners’ currencies. Such structure off trade denomination currencies is bad for Chinese companies to transfer exchange rate risks. Studies found that most companies manage exchange rate fluctuations through adjusting profit rates.The paper raises four recommendations on the basis of the above analysis. They are as follows: First, textile companies should increase their transformation paces to enhance the difference degree of their products and their marketing power; Second, textile companies should cooperate with each other to heighten foreign market share; Third, promoting the use of RMB in textile international trade as invoicing and settlement currency. Fourth, exploring and employing measures for avoiding fluctuation risk of exchange rate in international trade settlement.