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China?s Trade Imbalances: The Role of FDI

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Author Info

  • Wang, Yongqing
  • Wan, Guanghua

Abstract

China has been running a large trade surplus with the rest of the world, particularly with the USA and EU. This has caused considerable diplomatic tensions and tremendous pressure on the Chinese currency. Existing analytical studies, however, mostly focus on real exchange rate and income as determinants of China?s trade imbalances. Little attention has been given to the role of inflow and outflow of foreign direct investment (FDI). The purpose of this paper is to fill in this gap in the literature by adding FDI to China?s trade balance model. Fitting aggregate annual data from 1979 to 2007 to SURE (Seemingly Unrelated Regression Equations) and later ARDL (Autoregressive Distributed Lags) models, we find that although outflow FDI does not play an important role in determining Chinese trade flows and trade balance, inflow FDI contribute significantly to Chinese exports and thus its trade surplus with the rest of the world. Interestingly, devaluation of the Chinese currency Yuan is found not to affect Chinese trade balance. We also find that both Chinese income and the income of the world play important roles in Chinese trade imbalance. Finally, we find that Chinese trade imbalance is stable.

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File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2008/rp2008-103.pdf
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Bibliographic Info

Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number RP2008/103.

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Length: 16 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:unu:wpaper:rp2008-103

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Keywords: China; trade balance; FDI; real effective exchange rate;

References

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  1. Brada, Josef C & Kutan, Ali M & Zhou, Su, 1993. " China's Exchange Rate and the Balance of Trade," Economic Change and Restructuring, Springer, vol. 26(3), pages 229-42.
  2. Zhang, Yin & Wan, Guanghua, 2004. "What Accounts for China's Trade Balance Dynamics?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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  7. Haynes, Stephen E & Stone, Joe A, 1982. "Impact of the Terms of Trade on the U.S. Trade Balance: A Reexamination," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 702-06, November.
  8. Zhang, Zhaoyong, 1998. "Does Devaluation of the Renminbi Improve China’s Balance of Trade?," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 51(3), pages 437-445.
  9. Jeroen J.M. Kremers & Neil R. Ericsson & Juan J. Dolado, 1992. "The power of cointegration tests," International Finance Discussion Papers 431, Board of Governors of the Federal Reserve System (U.S.).
  10. Mohsen Bahmani-Oskooee & Taggert Brooks, 1999. "Bilateral J-Curve between U.S. and her trading partners," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(1), pages 156-165, March.
  11. Zhang, Zhichao, 2001. " China's Exchange Rate Reform and Exports," Economic Change and Restructuring, Springer, vol. 34(1-2), pages 89-112.
  12. Peter Wilamoski & Sarah Tinkler, 1999. "The trade balance effects of U.S. foreign direct investment in Mexico," Atlantic Economic Journal, International Atlantic Economic Society, vol. 27(1), pages 24-37, March.
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