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The international competitiveness of Chinese manufacturing firms and the exit of the renminbi–dollar peg

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  • Horatio Morgan

Abstract

This paper evaluates the implications of a shift from a pegged to a floating exchange rate regime for the international competitiveness and the economic behavior of Chinese manufacturing firms. Using a conceptual framework that characterizes the relationship between the exchange rate regime and the potential source of a firm's competitive advantage, it yields two key analytical results. First, Chinese manufacturing firms may increase their reliance on a low-margin pricing strategy as the exchange rate regime shifts towards a more flexible one. As a corollary, a low-margin pricing strategy may discourage Chinese manufacturing firms from undertaking costly research and development (R&D) activities, and investments in human capital development. Second, Chinese manufacturing firms have the incentive to employ various wage restraint measures under a floating exchange rate regime at least in the short term. These key analytical results provide insights into a number of policy-relevant issues that may arise at the firm-level. It concludes by providing some general directions on the timing of a complete transition to a floating exchange rate regime.

Suggested Citation

  • Horatio Morgan, 2011. "The international competitiveness of Chinese manufacturing firms and the exit of the renminbi–dollar peg," China Economic Journal, Taylor & Francis Journals, vol. 4(2-3), pages 159-168.
    • Handle: RePEc:taf:rcejxx:v:4:y:2011:i:2-3:p:159-168
    DOI: 10.1080/17538963.2011.666059
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