F REIGN TRADE - 中国国际贸易促进委员会

the current earnings of a firm rise. The
firm may use this additional income
to fund the sunk costs of entering new
markets. But once these investments are
made, it will be very difficult, and most
of the time impossible, to back out and
recover the cost of those investments
even in the case of an abrupt subsequent
currency appreciation. If firms are credit
constrained, they will face additional
difficulties to fund new investments,
and will be even more reluctant to take
the chance of engaging in exports to
markets characterised by highly volatile
exchange rates.
Lessons from China
In our recent paper, we find support
for this kind of mechanism using
a panel of Chinese firms. In this study,
we investigate both the impact of real
exchange-rate volatility on the exporting
behaviour and the way financial
constraints, together with financial
development, shape this relationship at
the firm level. Our empirical estimations
rely on export data for more than
100,000 Chinese exporters over the
period 2000-06. We have access to
information on firms’ foreign sales as
well as on the structure of their exports,
including the products and destinations
they serve. We also infer firm-level financial
vulnerability from the financial
dependence of their activities. Using
this detailed information, we identify
the impact of exchange-rate volatility
(defined as the yearly standard deviation
of monthly log differences in the real
exchange rate, the latter being computed
as the ratio of nominal exchange rate
of the yuan with respect to the partner’s
currency divided by the partner’s price
level) on different measures of intensive
and extensive margins, depending on
the level of financial constraints.
We find that that firms tend to
export less and fewer products to destinations
with higher exchange-rate
volatility. It also appears that the magnitude
of this export-deterring effect
depends on the extent of firms’ financial
vulnerability. To illustrate these results,
we can compare the reduction in the
export performance due to real-exchange-rate
volatility for strongly and
weakly credit-constrained firms. Regarding
the strongly constrained firms,
our results suggest that a two percentage
point (i.e. one standard deviation)
increase in yearly real-exchange-rate
volatility would reduce the export value
by 3%, and the number of exported
products by 0.85%. The effect is lower,
but still present, for weakly constrained
firms: for them, the same 2% increase
in yearly real-exchange-rate volatility
cuts the export value by 0.24%, and the
number of exported products by 0.07%.
Tough non-negligible, the effects appear
therefore quantitatively less important
for the extensive margin of trade than
for the intensive margin.
Mitigating role of financial
development
We subsequently exploit Chinese
cross-provincial heterogeneity to study
how financial development (measured as
the share of total credit over GDP in the
province) may mitigate both credit constraints
and exchange-rate volatility. We
do find that financial development directly
(that is, independently of the level
of financial dependence) dampens the
negative impact of real-exchange-rate
volatility, but our results also point to
an even stronger relaxation effect when
sectoral financial dependence increases,
especially on the intensive margin of export.
Quantitatively, this second type of
effect is much stronger than the direct
one, with a range from one to ten.
These results are directly in line
with recent macroeconomic literature
emphasising that financial development
tends to reduce the impact of exchangerate
volatility on economic performance.
Doing so, we provide a microfounded
investigation of this effect, and propose
a potential channel for it (through exports).
Policy implications
Our results emphasise that the
magnitude of the negative impact of
real-exchange-rate volatility depends
mainly on the extent of financial
constraints, and therefore, on the level
of financial development. These findings
in the Chinese context are especially
interesting, because China appears as a
typical case for analysing issues raised
by exchange-rate volatility for developing
countries. First, as the country is
progressively giving up its relatively rigid
exchange-rate system, the exchange-rate
volatility is expected to substantially rise
in the future, due to progressive removal
of trading restrictions on the yuan, with
a goal of having a basically convertible
currency by 2015. Second, the export
rate is particularly high related to the
economic size of China, leading to substantial
exposure to exchange-rate fluctuations.
Finally, the high heterogeneity
in terms of both (regional) financial
development and (sectoral) financial
dependence enlightens that credit constraints
are key in determining to what
extent the exchange-rate volatility will
be harmful to trade.
General lessons
There are a couple of lessons to
draw from our research:
The development of credit markets
is crucial to help firms to overcome the
additional export sunk cost related to
real-exchange-rate volatility.
Better access to external finance
would support the expansion of firms’
exports, particularly to those destinations
characterised by real-exchange
rate-related uncertainty.
More generally, our study emphasises
that emerging countries should be
careful when relaxing their exchangerate
regime.
Hard fixed pegs for developing
countries are certainly not always a
panacea, but moving to a fully floating
regime without the adequate level of
financial development could also prove
to be very hazardous for trade performance.
(VoxEU)
(Authors: Jérôme Héricourt,
Assistant Professor at EQUIPPE,
University of Lille; Sandra Poncet,
Professor at the University of Paris I
and scientific advisor at CEPII)
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