Is RMB appreciation a nightmare for the Chinese firms? An analysis on firm profitability and exchange rate

Using the matched sample from the Annual Survey of Industrial Firms (ASIF) and Chinese customs data during 2000-2006, this paper investigates firms' responses, including export activity and profitability, to the RMB exchange rate movement. It is found that although RMB appreciation decreases firm exports, it improves firm profitability. We address several possible channels to explain this counter-intuitive finding, including productivity enhancement, import costs reduction and export structure upgrading. We find that the import costs reduction and export structure upgrading are reasons that RMB appreciation leads to higher firm profitability, but there is no evidence to support the productivity channel. Furthermore, export structure upgrading is primarily based on improving technology in new products rather than changing the export structure of continued products.