Reconsidering the import demand function of China: evidence from asymmetric cointegration

This paper examines the association among the quantity of imports expressed in real terms, relative import prices, exchange rate volatility, foreign exchange reserves and real GDP in the aggregate import demand function for China during the period 2000Q1–2015Q4. The nonlinear autoregressive distributed lag model was applied to test for the long-run association among the variables and also to explore the short-run dynamics. The study obtains a long-run cointegrating association between the variables. An increase in income of China by 10% leads to the rise in imports by 6.7%, again a fall in the income level by 10% leads to the drop in the import demand by 39%. The impact of exchange rate volatility is rather mixed, a phase of rising fluctuations generates a decline in the imports by 21%; however, when the fluctuations are diminishing imports are not impacted significantly. The study lends support to the hypothesis that volatility of the exchange rates discourages imports. The study further shows that foreign exchange reserves do not impact imports in China. Such investigation will be important in making policy decisions related to trade and balance of payments in China.