The exchange rate of the RMB against the US dollar has a significant impact on the price of China's exports to the U.S. Enterprises or individuals conducting import/export trade transactions need to consider all possible influencing factors and make currency exchange decisions in their favor. In the previous articles, we have talked about how to manage the USD to RMB exchange rate in international trade and introduced application of USD to RMB in cross-border payment.
Ⅰ. CNY to USD exchange rate change affects Chinese exports to the US?
Exchange Rate Pass-Through (ERPT): When the exchange rate changes, it affects export prices. However, this pass-through is often incomplete, meaning that price adjustments are absorbed partly by producers and partly by buyers. Studies have shown that only half of exchange rate changes are reflected in foreign currency-denominated prices, while the other half are adjusted in domestic currency-denominated prices.
Pricing to Market (PTM): Chinese exporters engage in “pricing to market”, adjusting prices in domestic currency to maintain price stability in the destination market and maintain their market share. The extent of PTM depends on factors such as competition, market share and product differentiation.
Cost of production: Exchange rate appreciation can lower the domestic currency price of imported materials, thereby reducing production costs. : When the RMB appreciates, exporters' RMB-denominated profits may decrease because of lower export revenues, but the cost of imported raw materials may decrease.
If the RMB depreciates, purchasing costs will increase for Chinese firms that rely on imported raw materials, which may compress profit margins. However, if firms primarily use domestic raw materials, the depreciation of the RMB may compensate for the impact of higher costs by increasing export orders.
Profit Changes
Price competitiveness of exports: When the RMB depreciates, the price of Chinese exports denominated in US dollars will be relatively lower, which will enhance the price competitiveness of Chinese products in the US market, and thus may increase the volume of exports. Conversely, if the RMB appreciates, the dollar price of Chinese exports will increase, which may weaken the competitiveness of Chinese products in the U.S. market and lead to a decrease in export volume.
U.S. Import Prices: As the relative price of a Chinese product rises, the growth of exports of that good to the United States declines. Impact on export markets.
Ⅱ. What is the relationship between the CNY to USD exchange rate and the competitiveness of Chinese goods in the US market?
1. RMB depreciation increases export competitiveness
Price Advantage: The depreciation of the RMB reduces the price of Chinese exports denominated in US dollars, which means that it costs US importers less to buy Chinese goods, thus increasing the price competitiveness of Chinese goods in the US market.
Export growth: Increased price competitiveness typically promotes increased Chinese exports to the United States. For example, the share of Chinese manufacturing products (e.g., electronics, textiles, etc.) in the U.S. market may expand further during a period of RMB depreciation.
2. RMB appreciation weakens export competitiveness
Price Disadvantage: The appreciation of the RMB will increase the dollar price of China's exports, thereby weakening their price competitiveness in the U.S. market. This may cause U.S. consumers to turn to other cheaper alternatives, reducing demand for Chinese goods.
Reduced Exports: Reduced export competitiveness may lead to a reduction in the volume of Chinese exports to the U.S., which in turn affects the revenues and profits of Chinese firms.
3. Exchange rate flexibility to hedge against tariffs
If the U.S. imposes tariffs on China again, a resilient exchange rate will need to depreciate appropriately and slightly to hedge against higher prices for exported products in order to maintain export competitiveness.3 This could help find a new trade equilibrium as well as a balance of payments.
Ⅲ. How does a stable or volatile CNY to USD exchange rate influence the volume of trade between the two countries?
1. Stabilized exchange rate affects the volume of trade
Enhance trade stability: a relatively stable exchange rate helps to reduce the exchange rate risk faced by enterprises and facilitates their long-term trade planning and investment decisions, thus promoting the growth of bilateral trade.
Promote trade growth: a stable exchange rate helps maintain the price competitiveness of Chinese exports in the U.S. market, and also reduces the risk for U.S. importers, thus promoting the growth of bilateral trade volume.
2. Impact of exchange rate fluctuations on trade volume
Short-term fluctuations:
Risks to exporters: exchange rate fluctuations can increase the exchange risk of Chinese exporters. For example, the appreciation of RMB may lead to an increase in the price of Chinese export commodities, weakening their competitiveness in the U.S. market and thus reducing the volume of exports.
Importing firms benefit: For importing firms, an appreciating RMB will reduce the cost of imports and thus increase the volume of imports from the United States.
Long-term volatility:
In the short term, a depreciation of the RMB will make Chinese exports more price-competitive and stimulate export growth, but it may also lead to higher prices for imported goods and dampen imports.5 Conversely, an appreciation of the RMB will dampen exports and stimulate imports.
Increased uncertainty: Exchange rate volatility increases the uncertainty faced by firms, forcing them to invest more resources in risk management, such as using foreign exchange derivatives for hedging.
Taken together, changes in the exchange rate of the RMB against the US dollar have a great impact on the import and export trade of both sides. To make a real-time exchange rate query, you can visit XTransfer exchange rate platform.
