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Processing Trade, Exchange Rates and China’s bilateral Trade Balances

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  • Yuqing Xing

    (National Graduate Institute for Policy Studies)

Abstract

This paper analyzed the role of processing trade in China’s bilateral trade balances and the impact of the yuan’s appreciation on processing trade. The analysis is based on a panel data covering China’s 51 major trading partners from 1993-2008. The empirical analysis shows that: (1) processing trade accounted for 100% of China’s overall trade surplus and could explain most of China’s bilateral trade balances; (2) China’s processing trade shows a significant regional bias. While China has maintained a surplus with all G-7 countries in processing trade, it has run a significant deficit with most of East Asian economies; (3) East Asian economies are major sources and account for 77% of China’s processing imports. The econometric analysis reveals that processing imports from East Asian is eleven times of that from other regions; (4) the response of processing imports to the yuan’s appreciation differs with that of normal trade. Specifically, a 10% real appreciation of the yuan will reduce rather than increase China’s processing imports by 3.9%. Given that processing exports will decrease 9.6% for the same appreciation and China’s trade surplus is mainly generated from processing trade, a moderate appreciation of the yuan would have a very limited impact on China’s trade balance.

Suggested Citation

  • Yuqing Xing, 2011. "Processing Trade, Exchange Rates and China’s bilateral Trade Balances," GRIPS Discussion Papers 10-30, National Graduate Institute for Policy Studies.
  • Handle: RePEc:ngi:dpaper:10-30
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    Cited by:

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    2. 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.
    3. Li, Fangyi & Song, Zhouying & Liu, Weidong, 2014. "China's energy consumption under the global economic crisis: Decomposition and sectoral analysis," Energy Policy, Elsevier, vol. 64(C), pages 193-202.
    4. Bouvet, Florence & Ma, Alyson C. & Van Assche, Ari, 2017. "Tariff and exchange rate pass-through for Chinese exports: A firm-level analysis across customs regimes," China Economic Review, Elsevier, vol. 46(C), pages 87-96.
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    6. Bi-Huei Tsai, 2017. "Predicting the competitive relationships of industrial production between Taiwan and China using Lotka–Volterra model," Applied Economics, Taylor & Francis Journals, vol. 49(25), pages 2428-2442, May.
    7. Zhou, Jing & Latorre, María C., 2014. "How FDI influences the triangular trade pattern among China, East Asia and the U.S.? A CGE analysis of the sector of Electronics in China," Economic Modelling, Elsevier, vol. 44(S1), pages 77-88.
    8. Schröder, Marcel, 2017. "Mercantilism and China's hunger for international reserves," China Economic Review, Elsevier, vol. 42(C), pages 15-33.
    9. Xing, Yuqing, 2014. "Measuring Value Added in the People’s Republic of China’s Exports: A Direct Approach," ADBI Working Papers 493, Asian Development Bank Institute.
    10. Xing, Yuqing, 2012. "The People’s Republic of China’s High-tech Exports: Myth and Reality," ADBI Working Papers 357, Asian Development Bank Institute.
    11. Yuqing Xing, 2016. "Global Value Chains and China's Exports to High-income Countries," International Economic Journal, Taylor & Francis Journals, vol. 30(2), pages 191-203, June.
    12. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi, 2013. "A Simple Theory of Offshoring and Reshoring," MPRA Paper 44557, University Library of Munich, Germany, revised Feb 2013.
    13. THORBECKE, Willem, 2014. "Rebalancing Trade within East Asian Supply Chains," Discussion papers 14002, Research Institute of Economy, Trade and Industry (RIETI).
    14. 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.
    15. Dongzhou Mei & Ting Ji & Liutang Gong, 2020. "Would Currency Appreciation Reduce the Trade Surplus?," Annals of Economics and Finance, Society for AEF, vol. 21(1), pages 85-110, May.
    16. Kan, Siyi & Chen, Bin & Chen, Guoqian, 2019. "Worldwide energy use across global supply chains: Decoupled from economic growth?," Applied Energy, Elsevier, vol. 250(C), pages 1235-1245.
    17. Lili Yan ING & Miaojie YU, 2015. "Intensive and Extensive Margins of South–South–North Trade: Firm-Level Evidence," Working Papers DP-2015-70, Economic Research Institute for ASEAN and East Asia (ERIA).
    18. 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.
    19. Angus Chu & Guido Cozzi & Yuichi Furukawa, 2015. "Effects of Economic Development in China on Skill-Biased Technical Change in the US," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 227-242, April.
    20. Yusuf Tuna & Yunus Ozcan, 2015. "Bilateral Trade: Turkey and China," The Journal of European Theoretical and Applied Studies, The Center for European Studies at Kirklareli University - Turkey, vol. 3(2), pages 57-73.
    21. Yuqing Xing & Manisha Pradhananga, 2013. "How Important is Exports and FDI for China's Economic Growth?," GRIPS Discussion Papers 13-04, National Graduate Institute for Policy Studies.
    22. Junaid Masih & Dongsheng Liu & Javed Pervaiz, 2018. "The Relationship between RMB Exchange Rate and Chinese Trade Balance: Evidence from a Bootstrap Rolling Window Approach," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(2), pages 35-47, February.

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    Keywords

    Processing Trade; Exchange Rates; China;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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