2017 International Conference on Economics and Management Engineering (ICEME 2017) ISBN: 978-1-60595-451-6 An Empirical Study on the Impact of RMB Exchange Rate Fluctuation on Export Trade-Take China s Electronic Communication Equipment Manufacturing Industry as an Example Sheng LI 1,a*, Yu ZHU 2,b a lisheng@zuel.edu.cn, b germaine.zhu@hotmail.com 1,2 Zhongnan University of Economics and Law, Shanghai International Studies University *Corresponding author Key Words: Exchange Rate Fluctuations, Export Trade, Electronic Communications Manufacturing Industry. Abstract. In the context of the expected devaluation of the RMB, the article aims to delve into the impact of fluctuations in the RMB exchange rate on the export trade volume. Moreover, the article takes the electronic communication manufacturing industry as an example and establishes an econometric model which is based on the relevant economic data during the period from 2000 to 2014. The model is used to analyze the effects of exchange rate fluctuation, gross domestic product (GDP), wage level and export commodity price on export trade volume. Due to the availability of data, this article has not discussed the factors such as product brand, reputation, policy and so on. Based on the analysis results, this paper puts forward some suggestions for the development of China's exchange rate system and the means to avoid risks in export trade. Introduction and Literature Review During recent years, China's export trade volume keeps growing. Due to the increase in international trade in export trade, China began to increase exports of high value-added products. The Electronic Communication Equipment Manufacturing Industry, which is regarded as a representative of high-tech industries, have received more industrial R&D investments. Also, the government vigorously promotes industrial restructuring in order to improve the international competitiveness of products. Over the past decade, China's electronic communications equipment manufacturing industry has rapidly increased in the international market share. Since the exchange rate between two currencies is defines as the value of one country s currency in relation to another currency, which determines the relative price of goods and labor in the international financial and trade activities through price mechanism, it is one of the most important comprehensive indicators to measure the level of a country s export trade volume. On August 11 th, 2015, the central bank announced to reform the RMB mid-price quotation mechanism and linked it to the previous day's exchange rate. The exchange rate against the US dollar on that day rose from 6.2194 to 6.33 and depreciated by more than 2%. A year later, China has gradually formed a central parity mechanism based on closing exchange rates and fluctuations of a basket of currencies. This year, the International Monetary Fund (IMF) announced that RMB will be incorporated into the basket of currencies that make up the Special Drawing Right(SDR) from October 1. RMB accounted for 10.92% of the weight, after the dollar (41.73%) and the euro (30.93%). This surely provides more convenience for RMB in the international bank liabilities, cross-border payments, trade finance and other foreign exchange transactions. This paper attempts to explore how the volatility of the exchange rate will affect the export trade of the electronic communication equipment manufacturing industry under the constantly improved exchange rate mechanism. The academic community has long debated the impact of exchange rates on export trade. In general, the exchange rate changes can be divided into two aspects: First, the changes of the exchange rate levels. The appreciation or depreciation of the currency directly determines the 162
international competitiveness of a product; Second, the stability of the exchange rate. The fluctuations of the exchange rate have an impact on the actual benefits of international trade participants. The vast majority of scholars have reached a consensus on the impact of exchange rate levels on international trade: Under the Marshall-Lerner condition, the appreciation of the real effective exchange rate will lead to the decline in the international competitiveness of the country's exports, resulting in the deterioration of the international trade balance of the country; On the contrary, the depreciation of the real currency exchange rate will promote the country's export trade and improve the trade balance. However, economists have not reached a consistent conclusion on the relation between the exchange rate volatility and international trade flows. Scholars use GARCH, VAR, VEC, categorical unrelated and cointegration models to analyze the structure of export trade and trade behavior of different regions and industries. When the research goes deep into a specific industry, we will find that domestic research focuses on the impact of exchange rate fluctuations on the export trade of labor-intensive industries such as textile and garment manufacturing industry. There are few articles on domestic exchange rate and export trade of electronic communication equipment. They are mainly focused on the evaluation of international competitiveness of China's export of communication equipment manufacturing industry. A small number of scholars' articles involve the relationship between technological innovation and export of electronic communication equipment. Teng Liu (2015) adopted a comprehensive evaluation method and comparative analysis method to give a comprehensive evaluation of the international competitiveness of China's electronic information industry To reflect the changes in the competitiveness of the industry in China, the author also added three sub-sectors and the dynamic comparative analysis to determine the development trend and path direction of the international competitiveness. Ying Sun, Xinyi Geng and Na Wu(2014) takes into consideration the R & D capital investment intensity, R & D personnel input, the number of patents and other elements. The panel data model is used to explore the impact of technological innovation on the export of electronic communication equipment products. The main improvements in this paper are: First of all, some scholars use nominal exchange rates in their studies, but the RMB real effective exchange rate as a more effective indicators, taking into account the impact of different periods of inflation, can more accurately reflect the balance of goods and services changes in foreign exchange supply and demand; Secondly, some scholars choose the data which is relatively old and cannot reflect the changes in the import and export trade situation. This paper chooses the statistical data from 2007 to 2016 to describe the impact of exchange rate changes on manufacturing export trade more accurately and comprehensively. Finally, this paper takes the electronic communication equipment manufacturing industry as an example to study the impact of exchange rate on trade, and analyzes the important economic indicators of the industry and conducts empirical research to make the research more targeted. The arrangement of the article is as followed: The second part introduces the RMB exchange rate fluctuation and the status quo of China's electronic communication manufacturing industry; the third part is the literature review; the fourth part is the mathematical model establishment and empirical data analysis; the fifth part gives the empirical results; the last part includes conclusion and suggestions. Model Specification Data description In order to make the analysis more detailed, this paper uses the monthly data from 2007 to 2016. In this paper, the export value of communications equipment, computers and other electronic equipment manufacturing derives from National Bureau of Statistics. The paper selected the RMB real effective exchange rate index, which is the real effective exchange rate of RMB based on the consumer price index estimated and published by the IMF. The data comes from IFS. China's GDP 163
data come from the quarterly data of National Bureau of Statistics, which is converted to monthly data after the Eviews frequency conversion. FDI is the monthly data provided by the National Bureau of Statistics for the actual use of foreign direct investment. Data Sources and Variables In order to further explore the effects of RMB exchange rate changes on export trade since the reform of the exchange rate system. Due to the availability of data, this study of the electronic communications manufacturing industry as the representative collects the relevant data from 2007 to 201. According to theories of export trade at home and abroad, under the assumption that the relevant government economic policy is stable, the econometric model established in this study is as follows: EXP = a REER + b GDP + c FDI +,where is a constant. 1) Table 1. Data Sources and Variables. Number Variable Meaning Source 1 EXP Export value of electronic communication equipment manufacturing industry National Bureau of Statistics of China 2 REER Real effective exchange rate of RMB Website of IMF 3 GDP Gross Domestic Product National Bureau of Statistics of China 4 FDI Foreign Direct Investment National Bureau of Statistics of China Table 1 gives the data sources and a brief explanation of the variables. At the same time, in order to eliminate the heteroskedasticity of the sample data of these four variables, after the direct acquisition or calculation of the sample data, the study modifies the model by taking the natural logarithm form of these four variables: lnexp= alnreer+blngdp+clnfdi+d,where d is a constant. 2) Statistical Analysis of Data Descriptive Statistical Analysis. According to the relevant foreign exchange statistics, taking US dollar against yuan as example, before 2004, the RMB exchange rate is around 8.27. Since the reform of the RMB exchange rate system in 2005, the RMB exchange rate began to show a gradual upward trend. The amount of 100 dollars against RMB has reduced from 819 yuan to 619 yuan, which means that the exchange rate level is about 25% lower. Beginning in 2016, the yuan goes into the depreciation range. According to the latest data, the dollar against the yuan has fallen below the 6.9. RMB against the major foreign exchange rate as shown in Figure 1: 1200 1000 800 600 400 200 0 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 RMB against the US dollar (USD = 100) (yuan) RMB against the Hong Kong dollar (HKD = 100) (yuan) RMB against the euro (EUR = 100) (yuan) Figure 1. Trends of RMB to major foreign exchange rates (2002-2014). Source: National Bureau of Statistics of China. 164
From the composition of China's gross domestic product, the contribution rate of the secondary industry is relatively stable, ranging from 44% to 47%, average at 45.2%, which can be seen in Figure 2. At the same time, the total export volume of China as a major exporting country is increasing year by year. After 2004, the ratio of total exports to domestic production is higher than 30%. Although after 2008 the proportion returns to about 24%, the share of export value of electronic communication equipment in the total export volume has increased year by year, from 14.5% in 2000 to 32.1% in 2014, an increase of 121%. 800000 600000 400000 200000 0 GDP(100 billion yuan) GDP of he Secondary Industry(100 billion yuan) Figure 2. Total GDP and GDP of the secondary industry from 2000 to 2014 and total export volume of electronic equipment manufacturing industry. Source: National Bureau of Statistics of China. Correlation Analysis. (1)Simple Correlation Analysis. In order to understand and verify the correlation between the variables and the degree of correlation, the study needs to analyze the variables in the model. The results of the study are shown in the following Table 2. Table 2. Correlation Analysis. Variable Variable EX REER GDP FDI EX Coefficient 1.000 Significance - REER Coefficient -0.826 ** 1.000 Significance 0.000 - GDP Coefficient 0.949 ** 0.904 ** 1.000 Significance 0.000 0.000 - FDI Coefficient 0.675 ** 0.283 ** 0.509 ** 1.000 Significance 0.000 0.002 0.000 - The Pearson Correlation and the two-tailed significant (0.01 significant probability) of the simple correlation analysis show that the correlation between the independent variable and the dependent variable is significant, and the absolute value of the system in the table except the RMB real exchange rate does not exceed 0.5. The other variables of the absolute values are more than 0.5, and the significance probability is less than 0.01. Table 3. Partial Correlation Analysis. Variable EX Controlling for Variable REER Coefficient -0.160 GDP & FDI Significance 0.109 GDP Coefficient 0.754 REER & FDI Significance 0.000 FDI Coefficient 0.375 GDP & REER Significance 0.000 165
(2) Partial Correlation Analysis. Considering the correlation between the independent variables in the model, the above simple correlation analysis may not completely reflect the actual correlation between the variables and the degree of correlation. Therefore, we need to carry out partial correlation analysis, that is, on the basis of control variables, analysis of EX and other variables. The results of the analysis are as follows in Table 3. The correlation analysis showed that there was no significant negative correlation between EX and REER, but there was significant correlation between EX and GDP and FDI, and the probability of significance was less than 1. (3) Regression Analysis. In order to further clarify how each factor affects EX, in this study, we use multiple linear regression analysis. The regression results are shown in the following Table 4: Table 4. Regression Analysis. Variable Unstandardized Coefficients Significance R Square B Std. Error (Constant) 1305.929 340.969 0.000 0.922 REER -7.481 4.630 0.109 - GDP 0.019 0.002 0.000 - FDI 0.004 0.001 0.000 - In the model, the regression goodness R2 is 0.922, which indicates that the multiple linear regression equation has high explainability in the model. While the relationship between the model EX and REER is not significant, EX and other variables have significant positive correlations. In summary, the model can be obtained as follows: ln = 7.481ln +0.019ln +0.004ln +1305.929 3) The regression results show that the real effective exchange rate of RMB has no significant effect on the export trade of China's electronic equipment manufacturing industry. The export value of electronic communication equipment manufacturing industry is positively correlated with gross domestic product and foreign direct investment, but the RMB exchange rate changes have a relatively few impact on GDP and FDI. According to the data, during the period 2007-2016, it is estimated that for every 1% increase in GDP, the export value of electronic equipment manufacturing will increase by 0.019%. Empirical Results Based on the influence of exchange rate volatility on trade export volume and equilibrium exchange rate theory, this paper applies the linear regression model to measure the volatility of the RMB exchange rate and makes the study refinement into the field of electronic communication manufacturing. It examines the impacts of the exchange rate volatility on export trade in the field. From analyses and tests of the mathematical model, we can draw some conclusions on the impact of the RMB exchange rate volatility on export trade of China s electronic communication equipment manufacturing industry. First, the regression results show that the real effective exchange rate changes, gross domestic product and foreign direct investment have an impact on the export trade of China's electronic communication equipment manufacturing industry, but the impact of RMB real effective exchange rate changes on export is not significant. Second, the above test method uses REER, GDP, FDI and other economic indicators to measure. Because of the availability of data, other factors affecting the export trade is not included in the calculation, such as product brand, the company reputation, International logistics, political policy, tariff policy and so on. 166
Summary and Conclusion Since the second half of 2016, the depreciation expectation of RMB real exchange rate is increasing. On the one hand, enterprises should take advantage of the positive effect of exchange rate devaluation on export behaviour, but also take into account the upward pressure on the market caused by capital outflows, which leads to the slowdown in stock and economic growth. Enterprises should utilize different types of financial derivatives and hedging instruments such as external options, foreign exchange swaps to avoid exchange rate risk. Meanwhile enterprises should seize the opportunity to carry on trade innovations. Moreover, considering the influences of the price level and other external factors on RMB real exchange rate, the government should continue perfect the RMB exchange rate mechanism. As for high-tech enterprises like the electronic communications equipment manufacturing industry, the state should offer support in terms of capital investments and research development, in order to expand the synergistic and diffusion effects, promote industrial upgrading and optimize the structure of export trade products. For fluctuations which are difficult to directly control, our government should use fiscal and tax policies, interest rate policies and other control measures to adjust the trade balance, and reduce trade friction to the greatest extent. At the same time, the mode of trade development, the trade structure as well as the trade environment need to be further improved. The government should speed up the adjustment of industrial layout so that China's trade activities can grow continuously and steadily. References [1]Baron D P. Fluctuating Exchange Rates and the Pricing of Explorers[J]. Economic Inquiry, 1976, 14(3):425-38. [2]Doroodian K. Does exchange rate volatility deter international trade in developing countries? [J]. Journal of Asian Economics, 1999, 10(3):465-474. [3]Shaikh S A, Ouyang H. Exchange Rate Volatility and Trade Flows: Evidence from China, Pakistan and India[J]. 2015, 7(11):121. [4]Asteriou D, Masatci K, Pilbeam K. Exchange rate volatility and international trade: International evidence from the MINT countries[j]. Economic Modelling, 2016, 58:133-140. [5]Sercu P, Vanhulle C. Exchange rate volatility, international trade, and the value of exporting firms [J]. Journal of Banking & Finance, 1992, 16(1):155-182. [6]Huijie Chang, Wenjie Chen. An Empirical Study on the Impact of RMB Exchange Rate Fluctuation on Guangxi's Import and Export Trade - Based on VAR Model Analysis [J]. Market Forum, 2015(4):50-52. [7]Liu Teng. The Comparative Study of Chinese International Competitiveness in ICT Industry[D]. University of International Business and Economics, 2015. [8]Yin Sun, Xingyi Geng, Na Wu. Research on the Impact of Technological Innovation on Chinese Export of Electronics and Communication Devices[J]. Journal of University of Science and Technology Beijing (Social Sciences Edition), 2014, 30(1):95-101. [9]Yujiang Bi. The Effect of Real Effective Exchange Rate on China's Commodity Import and Export - An Empirical Test Based on Standard International Trade Classification[J]. World Economy Studies, 2005(6):61-67. [10]Honglei Huo. Research on the Impact of RMB Appreciation of Import and Export Trade of China[J]. Min Ying Ke Ji, 2015(12):223-224. 167
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