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Are Chinese exports sensitive to changes in the exchange rate?

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Abstract

This paper builds a model of two types of Chinese exports, those processed and assembled largely from imported inputs (\"processed\" exports) and \"non-processed\" exports. Based on this model, the sensitivity of Chinese exports to exchange rate changes is empirically examined. Unlike previous work, the estimation period includes the net real appreciation of the renminbi that has occurred over the past three years. The results show that greater exchange rate appreciation dampens export growth, both for non-processed and processed exports, with the estimated cumulative price elasticity being substantially greater than unity. When the source of the increase in the Chinese real exchange rate is appreciations against the currencies of other emerging Asian trading partners, the effect on processing exports is positive but insignificant, while the effect on non-processing exports is significantly negative. By contrast, when the source of the increase in the Chinese real exchange rate is appreciation against China's advanced-economy trading partners, the effects on both types of exports are negative. These results are consistent with the predictions of the theoretical model. Counterfactual simulations based on the estimated model strongly suggest that if the trade-weighted real renminbi had appreciated at an annual rate of 10 percent per quarter since mid-2005, Chinese real exports would have been roughly 30 percent lower today. Thus greater exchange rate flexibility could contribute to lowering China's huge trade surplus through restraining growth of exports.

Suggested Citation

  • Shaghil Ahmed, 2009. "Are Chinese exports sensitive to changes in the exchange rate?," International Finance Discussion Papers 987, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:987
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    Cited by:

    1. Heiwai Tang & Yifan Zhang, 2012. "Exchange Rates and the Margins of Trade: Evidence from Chinese Exporters," CESifo Economic Studies, CESifo Group, vol. 58(4), pages 671-702, December.
    2. Yin-Wong Cheung & Menzie D. Chinn & Xingwang Qian, 2014. "The Structural Behavior of China-US Trade Flows," CESifo Working Paper Series 5123, CESifo.
    3. Soyoung Kim & Yoonbai Kim, 2016. "The RMB Debate: Empirical Analysis on the Effects of Exchange Rate Shocks in China and Japan," The World Economy, Wiley Blackwell, vol. 39(10), pages 1539-1557, October.
    4. Thorbecke, Willem & Chen, Chen & Salike, Nimesh, 2021. "China’s exports in a protectionist world," Journal of Asian Economics, Elsevier, vol. 77(C).
    5. Xing, Yuqing, 2012. "Processing trade, exchange rates and China's bilateral trade balances," Journal of Asian Economics, Elsevier, vol. 23(5), pages 540-547.
    6. Abdul Rashid & Shahid Mahmood Waqar, 2017. "Exchange rate fluctuations, firm size, and export behavior: an empirical investigation," Small Business Economics, Springer, vol. 49(3), pages 609-625, October.
    7. Willem Thorbecke, 2013. "Investigating China's Disaggregated Processed Exports: Evidence that Both the RMB and Exchange Rates in Supply Chain Countries Matter," The World Economy, Wiley Blackwell, vol. 36(10), pages 1245-1260, October.
    8. Thorbecke, Willem, 2019. "East Asian value chains, exchange rates, and regional exchange rate arrangements," Journal of Asian Economics, Elsevier, vol. 65(C).
    9. Cheung, Yin-Wong & Chinn, Menzie D. & Qian, XingWang, 2012. "Are Chinese trade flows different?," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2127-2146.
    10. Nobuaki Yamashita & Sisira Jayasuriya, 2013. "The export response to exchange rates and product fragmentation: the case of Chinese manufactured exports," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 18(2), pages 318-332.
    11. Willem Thorbecke, 2010. "How Would an Appreciation of the Yuan Affect the People's Republic of China's Surplus in Processing Trade?," ADBI Working Papers 219, Asian Development Bank Institute.
    12. Thorbecke, Willem, 2011. "Investigating the effect of exchange rate changes on china's processed exports," Journal of the Japanese and International Economies, Elsevier, vol. 25(2), pages 33-46, June.
    13. Yin-Wong Cheung, 2012. "Exchange Rate Misalignment - The Case of the Chinese Renminbi," CESifo Working Paper Series 3797, CESifo.
    14. Willem Thorbecke, 2010. "How Would an Appreciation of the Yuan Affect the People’s Republic of China’s Surplus in Processing Trade?," Macroeconomics Working Papers 22823, East Asian Bureau of Economic Research.
    15. Alam, Aftab & Ma, Jingmei & Hussain, Ibrar, 2024. "China’s macroeconomic performance affects trading partners: How can their policies respond?," Journal of Policy Modeling, Elsevier, vol. 46(2), pages 448-474.
    16. Kim, Kyungmin, 2021. "Production sharing and exchange rate pass-through," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 817-835.
    17. Liao, Wei & Shi, Kang & Zhang, Zhiwei, 2012. "Vertical trade and China's export dynamics," China Economic Review, Elsevier, vol. 23(4), pages 763-775.
    18. Xu, Yuan & Guo, Yuwei, 2021. "Exchange rate disconnect and financial constraints —evidence from Chinese firms," Journal of Comparative Economics, Elsevier, vol. 49(4), pages 1008-1019.
    19. Willem Thorbecke, 2010. "Investigating the Effect of Exchange Rate Changes on the People’s Republic of China’s Processed Exports," Finance Working Papers 21989, East Asian Bureau of Economic Research.
    20. Kappler, Marcus & Reisen, Helmut & Schularick, Moritz & Turkisch, Edouard, 2013. "The Macroeconomic Effects of Large Exchange Rate Appreciations," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 24(3), pages 471-494.
    21. Chen, Pei-Fen & Zeng, Jhih-Hong & Lee, Chien-Chiang, 2018. "Renminbi exchange rate assessment and competitors' exports: New perspective," China Economic Review, Elsevier, vol. 50(C), pages 187-205.
    22. Eichengreen, Barry & Tong, Hui, 2015. "Effects of renminbi appreciation on foreign firms: The role of processing exports," Journal of Development Economics, Elsevier, vol. 116(C), pages 146-157.
    23. Fedoseeva, Svetlana & Zeidan, Rodrigo, 2016. "A dead-end tunnel or the light at the end of it: The role of BRICs in European exports," Economic Modelling, Elsevier, vol. 59(C), pages 237-248.
    24. Li, Hongbin & Ma, Hong & Xu, Yuan, 2015. "How do exchange rate movements affect Chinese exports? — A firm-level investigation," Journal of International Economics, Elsevier, vol. 97(1), pages 148-161.

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