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Vertical Trade and China's Export Dynamics

  • 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)

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.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 102010.

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Length: 28 pages
Date of creation: Apr 2010
Date of revision:
Handle: RePEc:hkm:wpaper:102010
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  1. Hua, Ping, 2007. "Real exchange rate and manufacturing employment in China," China Economic Review, Elsevier, vol. 18(3), pages 335-353.
  2. BAAK, SaangJoon, 2008. "The bilateral real exchange rates and trade between China and the U.S," China Economic Review, Elsevier, vol. 19(2), pages 117-127, June.
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  16. 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.).
  17. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
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