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China's exchange rate policy and Asian trade

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  • Alicia García-Herrero
  • Tuuli Koivu
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    Abstract

    This paper shows empirically that China's trade balance is sensitive to fluctuations in the real effective exchange rate of the renminbi. 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 potential reduction in the trade surplus resulting from an increase in the renminbi exchange rate is limited mainly because Chinese imports do not react as expected to a renminbi appreciation - they tend to fall rather than increase. By estimating bilateral import equations for China and its major trade partners, we find that the reaction for imports is generally confirmed for China's trade with Southeast Asian countries. That result might be attributable to Asia's vertical integration, as a large share of Chinese imports from Southeast Asia are re-exported. We also find that 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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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 282.

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    Length: 29 pages
    Date of creation: Apr 2009
    Date of revision:
    Handle: RePEc:bis:biswps:282

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

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    References

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    1. Koichiro Kamada & Izumi Takagawa, 2005. "Policy coordination in East Asia and across the Pacific," International Economics and Economic Policy, Springer, vol. 2(4), pages 275-306, December.
    2. Phillips, Peter C B & Loretan, Mico, 1991. "Estimating Long-run Economic Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 407-36, May.
    3. Willem THORBECKE, 2006. "The Effect of Exchange Rate Changes on Trade in East Asia," Discussion papers 06009, Research Institute of Economy, Trade and Industry (RIETI).
    4. Bayoumi, Tamim & Jayanthi, Sarma & Lee, Jaewoo, 2006. "New Rates from New Weights," CEPR Discussion Papers 5860, C.E.P.R. Discussion Papers.
    5. Jaime Marquez & John W. Schindler, 2006. "Exchange-rate effects on China's trade: an interim report," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    6. Alan G. Ahearne & John G. Fernald & Prakash Loungani & John W. Schindler, 2006. "Flying geese or sitting ducks: China’s impact on the trading fortunes of other Asian economies," International Finance Discussion Papers 887, Board of Governors of the Federal Reserve System (U.S.).
    7. Anuradha Dayal-Gulati & Valerie Cerra, 1999. "China's Trade Flows," IMF Working Papers 99/1, International Monetary Fund.
    8. Cerra, Valerie & Saxena, Sweta Chaman, 2003. "How responsive is Chinese export supply to market signals?," China Economic Review, Elsevier, vol. 14(3), pages 350-370.
    9. Jan Voon & Li Guangzhong & Jimmy Ran, 2006. "Does China really lose from RMB revaluation? Evidence from some export industries," Applied Economics, Taylor & Francis Journals, vol. 38(15), pages 1715-1723.
    10. Jaime Marquez & John W. Schindler, 2006. "Exchange-rate effects on China's trade: an interim report," Working Paper Series 2006-41, Federal Reserve Bank of San Francisco.
    11. Agnès Bénassy-Quéré & Amina Lahrèche-Revil, 2003. "Trade Linkages and Exchange Rates in Asia: The Role of China," Working Papers 2003-21, CEPII research center.
    12. Peter Hooper & Karen Johnson & Jaime Marquez, 1998. "Trade elasticities for G-7 countries," International Finance Discussion Papers 609, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:
    1. Yuqing Xing, 2011. "Processing Trade, Exchange Rates and China’s bilateral Trade Balances," GRIPS Discussion Papers 10-30, National Graduate Institute for Policy Studies.
    2. Ryan, John, 2009. "China and the Reserve Currency Question," MPRA Paper 18218, University Library of Munich, Germany.
    3. Zhang, Chenying, 2010. "Sterilization in China: Effectiveness and Cost," Working Papers 10-29, University of Pennsylvania, Wharton School, Weiss Center.
    4. Nishimura, Yusaku & Hirayama, Kenjiro, 2013. "Does exchange rate volatility deter Japan-China trade? Evidence from pre- and post-exchange rate reform in China," Japan and the World Economy, Elsevier, vol. 25, pages 90-101.

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