Exchange Rates, Optimization of Industrial Resources Allocation Efficiency, and Environmental Pollution: Evidence from China Manufacturing

The impact of exchange-rate fluctuations on resource reallocation is of particular interest to researchers and policymakers with China's further opening to the international market and the transformation of economic growth. With high-speed growth, pollution issues have become an international concern. This paper examines how RMB exchange-rate movements affect resource allocation efficiency within industries at different pollution levels, based on the data of Chinese industrial enterprises during 1998-2007. Unlike previous studies, we analyze how within-industry productivity dispersion reacts to exchange-rate appreciation from the perspective of the heterogeneity across firms in their exposure to foreign competition in each industry. Our findings suggest that appreciation causes an increase in productivity dispersion, which implies a decrease in resource allocation efficiency. The increased dispersion of industries with higher pollution levels is more diminutive than lower levels. The productivity dispersion is intended to shrink for high-polluting industries due to the real exchange-rate appreciation. Appreciation plays a positive role in efficiency for pollution-intensive industries.