Quality of Chinese Exported Products, Exchange Rate Pass-Through, and Export Pricing Capability: From the Perspective of Income Distribution in Export Destination Countries
ZENG Lifei, JIANG Kai, CAO Wei
School of Finance, Zhejiang Gongshang University; Huzhou Branch of Hangzhou Bank
Summary:
The export pricing capability of a company is a key indicator of its product competitiveness. In 2019, the Central Committee of the Communist Party of China and the State Council detailed four measures in their “Guiding Opinions on Promoting High-Quality Trade Development”: strengthening the industrial foundation for trade, enhancing trade innovation capabilities, improving product quality, and accelerating brand cultivation. These measures were aimed at shifting Chinese export companies from relying solely on cost advantages to competing on quality and structural advantages. In this context, studying the impact of export product quality on exchange rate pass-through can provide valuable policy guidance for Chinese export companies, so they can better manage exchange rate risks, enhance their product pricing capabilities, and promote the high-quality development of foreign trade. In this paper we address several questions. First, will Chinese export companies adopt a “quality according to market” strategy, whereby they adjust product quality based on the income distribution of the destination country？ Second, how does this approach to quality affect enterprise pricing and, in turn, exchange rate pass-through effects？ Third, what role does the income distribution of export destination countries play in the impact of product quality on exchange rate pass-through effects？ Finally, are there differences in the pricing capabilities of Chinese export companies across different countries？ These questions are important for understanding the evolving landscape of China's foreign trade and for providing policy guidance to export companies as they navigate market fluctuations and changing consumer preferences. The research findings provide several key insights. First, Chinese export companies do tend to adopt a “quality according to market” strategy, by supplying higher-quality products to countries and regions with higher per capita income and lower Gini coefficients. Second, this strategy affects the “price according to market” strategy, and the income distribution in destination countries influences the exchange rate pass-through effect through product quality. Notably, Chinese export companies exhibit greater pricing ability in countries with low per capita income and high Gini coefficients. Finally, the study highlights the importance of improving product quality and diversifying export destinations to promote high-quality development in China's foreign trade. This paper makes several potential contributions. First, we incorporate income distribution structures into heterogeneous consumer preferences using the Brambilla and Porto (2016) model. The optimal strategies for export companies to implement “quality according to market” or “price according to market” are analyzed when enterprise profits are maximized. Two mechanisms are proposed for the impact of income distribution on exchange rate pass-through effects: through the average quality preference of consumers, which affects enterprise export product quality and thus affects exchange rate pass-through effects, and by regulating the impact of product quality on exchange rate pass-through effects. Second, the influence of income distribution on product quality and exchange rate pass-through effects is examined from the perspectives of income level and income inequality. Third, we calculate the quality of Chinese products at the export company level and destination country consumer level. Our empirical research reveals that product quality from the consumer's perspective has more influence on enterprise product pricing. We offer the following policy implications. First, Chinese export enterprises should continue to implement diversification measures for export destination countries, particularly to increase export trade to countries along the “Belt and Road” route (most of which are low-income countries). Policy authorities should therefore take the opportunity to “escort” Chinese enterprises to implement diversified measures for export destination countries, particularly in terms of formulating relevant export trade policies to eliminate any concerns of export enterprises. Second, Chinese exporters should continue to improve the quality of their products. “High-quality” is the best weapon Chinese enterprises can employ to deal with the impact of RMB exchange rate changes on export prices, and it is also the most effective approach for Chinese products entering developed markets. Third, our study provides a theoretical basis for implementing the common prosperity policy in China. China's income inequality has currently exceeded the World Bank line, and China has long imported luxury goods at prices much higher than in European countries. China's income inequality is likely to fall with the implementation of the common prosperity policy, making it more likely that China will import cheaper foreign high-quality products to enhance the overall welfare level.
曾利飞, 蒋凯, 曹伟. 中国出口产品质量、汇率传递与出口定价能力 ——基于出口目的国收入分布视角[J]. 金融研究, 2023, 516(6): 75-93.
ZENG Lifei, JIANG Kai, CAO Wei. Quality of Chinese Exported Products, Exchange Rate Pass-Through, and Export Pricing Capability: From the Perspective of Income Distribution in Export Destination Countries. Journal of Financial Research, 2023, 516(6): 75-93.
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