Challenging the Dominant Currency? Exchange Rate Pass-Through in China's Importing Trades

Abstract

I examine China’s import trade, in particular how China’s import prices fluctuate with movements in the exchange rate of Chinese currency RMB (yuan) against both international currencies such as the Euro and the US dollars and currencies of its trading partners. Through analysis of cross-industry and cross-country data, I compile and organize price indexes that capture changes in Chinese import price and study sources of these changes. I conclude that Chinese import prices are very sensitive to changes in foreign currency, especially US dollar. This suggests that very little of trade between China and its trading partner involves invoicing goods in RMB. The invoicing decision of China’s trading partners, however, does not seem to factor in China’s large share in global trade. Furthermore, through the study of cross-country datasets I verify that prices of Chinese import are stable in their currency of denomination, thereby leading to a stable pass-through pattern.