Pricing to Market: Chinese Export Pricing to the USA after the Peg

Authors


Abstract

In July 2005, the Chinese Government unpegged the RMB from the US dollar. As the RMB has followed a remarkably predictable appreciation over time, I examine the price of Chinese exports to the USA after unpegging the exchange rate. Results suggest that the Chinese industries with greater import market share were able to raise their prices after the removal of the pegged exchange rate regime; however, over time there is a significant deflationary trend. Chinese export prices tended to decrease under an unanticipated RMB appreciation; this effect was more pronounced for industries with more pricing flexibility. This suggests that Chinese exporters are consistently “pricing to market” and thus creating a significant foreign exchange policy implication. Specifically, a more flexible exchange rate regime will likely have little impact on the prices of Chinese exports to the USA but might increase the profit volatility of Chinese firms.

Ancillary