Exchange Rate Appreciation, Heterogeneous Exchange Rate Pass-Through And Value Added Promotion

The paper uses a very rich linked firm-product data which is calculated by the Chinese manufacture firm-level data and the Custom data from 2000 to 2006 to analyze the heterogeneous pricing-to-market strategies of exporters, which differ in their value added ratio, to exchange rate appreciation started from 2005. In 2005 China began its exchange rate system reform, and this exchange rate shock provides a way to identify the effect of exchange rate appreciation on the choice of exporters to adjust their exporting price or quantity that are variant in their value added. The paper finds that firms with low value added ratio are weak in the ability of bargaining. So they will cost more from exchange rate appreciation and get compensation from the extension of quantity. They own higher elasticity both of exchange rate to price and quantity, and have more completive exchange rate pass-through. The result is robust though we choose to change the range of our sample, and to change the form of our estimation, and to include other important factors. It proves our conclusion to be strong in ability to explain the reality. Moreover, the paper make a deep analysis of the heterogeneous survival condition in trade relationship of exporting firms when suffer from the shock of exchange rate appreciation. It tries to find how the exchange rate appreciation because of the exchange rate system reform will influence the distribution of exporting firms'value added. The paper finds that exporting firms with low value added ratio bear heavier cost pressure from exchange rate appreciation and have more difficulty to survive in exporting market. So that the mechanism of "winner exist and loser exit" will come into effect and it will enforce exporters to promote their value added. Totally, the paper concludes that the appreciation of RMB brings heavy pressure to export, but it also contributes to the promotion of Chinese exporting firms' value added increasing so that it will make the growth of China's exporting to be more healthy and steady.