Processing Trade, Exchange Rates, and the Peopleâ€™s Republic of Chinaâ€™s Bilateral Trade Balances
ï»¿This paper analyzes the role of processing trade in the Peopleâ€™s Republic of China (PRC)â€™s bilateral trade balances and the impact of the yuanâ€™s appreciation on processing trade. The analysis is based on panel data covering the PRCâ€™s 51 trading partners from 1993â€“2008. The empirical analysis shows that : (1) processing trade accounts for 100% of the PRCâ€™s overall trade surplus and can explain most of its bilateral trade balances; (2) the PRCâ€™s processing trade shows a significant regional biasâ€”its processing exports to East Asian economies are three times those to other regions while its processing imports from East Asian economies are eleven times those from other regions; (3) the PRC is one of the major sources of its own processing imports, accounting for 16.8% of its total processing imports from all 51 trading partners; and (4) the appreciation of the yuan would affect both processing imports and exports in the same directionâ€”specifically, a 10% real appreciation of the yuan would reduce not only the PRCâ€™s processing exports by 9.6% but also its processing imports by 3.9%. Therefore, a moderate appreciation of the yuan would have a very limited impact on the PRCâ€™s trade balance.
|Date of creation:||Mar 2011|
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