ADBI Working Paper Series
This paper estimated the pass-through effects of yuans exchange rates on prices of the US and Japanese imports from the Peoples Republic of China (PRC). Empirical results show that, a 1% nominal appreciation of the yuan would result in a 0.23% increase in prices of the US imports in the short run and 0.47% in the long run. Japanese import prices were relatively more responsive to changes of the bilateral exchange rates between the yuan and the yen. For a 1% nominal appreciation of the yuan against the yen, Japanese import prices would be expected to rise 0.55% in the short run and 0.99%, a complete pass-through, in the long run. The high degree of pass-through effects were also found at the disaggregated sectoral level: food, raw materials, apparel, manufacturing, and machinery. However, further analysis indicated that the high pass-through effects in the case of Japan were mainly attributed to the PRCs policy to peg the yuan to the United States (US) dollar, and that the dollar is used as a dominant invoicing currency for the PRCs exports to Japan. After controlling the currency invoicing factor, I found no evidence that the yuans cumulative appreciation since July 2005 was passed on to prices of Japanese imports at either the aggregate or disaggregated levels. The estimated low pass-through effects of the yuans appreciation suggest that a moderate appreciation of the yuan would have very little impact on the PRCs trade surplus.