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China s Exchange Rate Policy and Asian Trade

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  • Alicia Garcia Herrero
  • Tuuli Koivu
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    Abstract

    This paper shows empirically that China’s trade balance is sensitive to fluctuations in the renminbi real effective exchange rate. However, the current size of the trade surplus is such that exchange rate policy, alone, will probably not be able to address the imbalance. The reduction in the trade surplus is limited mainly because Chinese imports do not react as expected to exchange rate appreciation. In fact, they tend to fall rather than increase. By estimating bilateral import equations for China and its major trading partners, we find that such reaction of imports to exchange rate appreciation is generally confirmed for South-East Asian countries but not for others. This might be a direct consequence of Asia’s vertical integration as a large share of Chinese imports from Southeast Asia is directed to reexporting. We also find that the total exports from a number of Asian countries react negatively to a renminbi appreciation, which points to a dependence of Asian countries’ exports on those of China.

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    File URL: http://www.bbvaresearch.com/KETD/fbin/mult/WP_0916_tcm348-212762.pdf?ts=15112011
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    Bibliographic Info

    Paper provided by BBVA Bank, Economic Research Department in its series Working Papers with number 0916.

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    Length: 38 pages
    Date of creation: Jul 2009
    Date of revision:
    Handle: RePEc:bbv:wpaper:0916

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    Related research

    Keywords: China; trade; exports; real exchange rate;

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    Cited by:
    1. Zhang, Chenying, 2010. "Sterilization in China: Effectiveness and Cost," Working Papers 10-29, University of Pennsylvania, Wharton School, Weiss Center.

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