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China's Economic Growth and its Real Exchange Rate

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Author Info

  • Rod Tyers
  • Jane Golley
  • Bu Yongxiang
  • Iain Bain

Abstract

Pressure from abroad to revalue China’s currency appears to associate its rapid economic growth with the likelihood of a real appreciation. In a world of open economies and differentiated traded goods, however, development-related productivity and endowment growth shocks tend to cause real depreciations, the principal exception being the Balassa case where non-traded service sectors are large and productivity growth is considerably faster in traded sectors. Yet China is special amongst developing countries because its labour force is likely to decline in future and this will cause upward pressure on its real exchange rate. This paper quantifies the links between growth shocks and the Chinese real exchange rate using a dynamic model of the global economy with open capital accounts and full demographic underpinnings to labour supply. The results suggest that, in the short run, the dominant force is financial capital inflows, which are appreciating. In the long run demographic forces prove to be weak relative to skill transformation and services sector productivity. These are both comparatively powerful and depreciating. While financial capital inflows driven by expected appreciation may be self-fulfilling in the short run, these results suggest that the fundamental forces are more likely to favour a trend toward real depreciation.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c012_014.

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Length: 32 pages JEL Classification: C53, C68, E27, F21, F43, F47, J11, O11
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:deg:conpap:c012_014

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Keywords: Exchange rate; economic growth; demographic change; Chinese economy;

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References

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  1. Eswar Prasad & Raghuram Rajan, 2006. "Modernizing China's Growth Paradigm," IMF Policy Discussion Papers 06/03, International Monetary Fund.
  2. Rod Tyers & Iain Bain & Jahnvi Vedi, 2006. "The global implications of freer skilled migration," PGDA Working Papers, Program on the Global Demography of Aging 1006, Program on the Global Demography of Aging.
  3. Shang-Jin Wei & Eswar Prasad, 2005. "The Chinese Approach to Capital Inflows," IMF Working Papers 05/79, International Monetary Fund.
  4. Holz, Carsten A., 2006. "New capital estimates for China," China Economic Review, Elsevier, Elsevier, vol. 17(2), pages 142-185.
  5. Jeffrey Frankel, 2005. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," NBER Working Papers 11274, National Bureau of Economic Research, Inc.
  6. Chow, Gregory & Lin, An-loh, 2002. "Accounting for Economic Growth in Taiwan and Mainland China: A Comparative Analysis," Journal of Comparative Economics, Elsevier, vol. 30(3), pages 507-530, September.
  7. Liu, Jing & Nico van Leeuwen & Tri Thanh Vo & Rod Tyers & Thomas W. Hertel, 1998. "Disaggregating Labor Payments by Skill Level in GTAP," GTAP Technical Papers 314, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  8. Eswar Prasad & Shang-Jin Wei, 2005. "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations," NBER Working Papers 11306, National Bureau of Economic Research, Inc.
  9. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2007. "Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 103-132 National Bureau of Economic Research, Inc.
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  11. Joshua Aizenman & Jaewoo Lee, 2008. "Financial versus Monetary Mercantilism: Long-run View of Large International Reserves Hoarding," The World Economy, Wiley Blackwell, vol. 31(5), pages 593-611, 05.
  12. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
  13. Eswar Prasad & Qing Wang & Thomas Rumbaugh, 2005. "Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China," IMF Policy Discussion Papers 05/1, International Monetary Fund.
  14. Mohsin S. Khan & Ehsan U. Choudhri, 2004. "Real Exchange Rates in Developing Countries," IMF Working Papers 04/188, International Monetary Fund.
  15. Alwyn Young, 2003. "Gold into Base Metals: Productivity Growth in the People's Republic of China during the Reform Period," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 111(6), pages 1220-1261, December.
  16. Bloom, David E & Williamson, Jeffrey G, 1998. "Demographic Transitions and Economic Miracles in Emerging Asia," World Bank Economic Review, World Bank Group, World Bank Group, vol. 12(3), pages 419-55, September.
  17. Jaewoo Lee & Joshua Aizenman, 2006. "Financial Versus Monetary Mercantilism," IMF Working Papers 06/280, International Monetary Fund.
  18. Ken Miyajima, 2005. "Real Exchange Rates in Growing Economies," IMF Working Papers 05/233, International Monetary Fund.
  19. Cai Fang & Wang Dewen, 2005. "Demographic transition: implications for growth," Labor and Demography, EconWPA 0512001, EconWPA.
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