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Vertical Trade and China's Export Dynamics

Author

Listed:
  • Wei Liao

    (Hong Kong Institute for Monetary Research)

  • Kang Shi

    (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research)

  • Zhiwei Zhang

    (China International Capital Corporation)

Abstract

This paper examines how China's exports are affected by exchange rate shocks from countries who supply intermediate inputs to China. We build a simple small open economy model with intermediate goods trade to show that due to the intraregional trade in intermediate goods, a devaluation of other Asian currencies does not necessarily damage China's exports, as imported intermediate goods could become cheaper. This channel through the cost of intermediate goods depends critically on the share of intermediate goods used in China's export goods production and the degree of exchange rate pass-through in imported intermediate goods prices. If prices for intermediate goods are not very sticky, the effect through this channel could be large and China's exports could even benefit. We find the above findings do not depend on China's choice of currency invoicing between RMB and the US dollar or the choice between fixed and flexible exchange rate regimes.

Suggested Citation

  • Wei Liao & Kang Shi & Zhiwei Zhang, 2010. "Vertical Trade and China's Export Dynamics," Working Papers 102010, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:102010
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. repec:wsi:jicepx:v:08:y:2017:i:01:n:s1793993317500016 is not listed on IDEAS
    2. 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.
    3. Yao Amber Li & Jenny Xu & Carol Zhao Chen, 2015. "Import Response to Exchange Rate Fluctuations: A Micro-level Investigation," HKUST IEMS Working Paper Series 2015-27, HKUST Institute for Emerging Market Studies, revised May 2015.
    4. Ogundipe, Adeyemi & Amaghionyeodiwe, Lloyd, 2013. "Transnational Trade In Ecowas: Does Export Content Matter?," MPRA Paper 51617, University Library of Munich, Germany.
    5. Wong, Chin-Yoong & Eng, Yoke-Kee & Habibullah, Muzafar Shah, 2014. "Rising China, anxious Asia? A Bayesian New Keynesian view," China Economic Review, Elsevier, vol. 28(C), pages 90-106.
    6. Shafaeddin, Mehdi, 2010. "The Role of China in Regional South-South Trade in Asia-Pacific: Prospects for industrialization of the low-income countries," MPRA Paper 26358, University Library of Munich, Germany.
    7. Gee Hee Hong & Jaewoo Lee & Wei Liao & Dulani Seneviratne, 2016. "China and Asia in Global Trade Slowdown," IMF Working Papers 16/105, International Monetary Fund.

    More about this item

    Keywords

    Vertical Trade; Exchange Rates; Export Dynamics; Currency Invoicing;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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