BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Alicia Garcia-Herrero and Tuuli Koivu
Can the Chinese trade surplus be reduced through exchange rate policy?
Abstract: This paper shows empirically that China’s trade balance is
sensitive to fluctuations in the real effective exchange rate of the
renminbi, although the size of the surplus is such that exchange rate
policy alone will be unable to address the imbalance. One of the main
reasons why the reduction in the trade surplus is limited is that Chinese
imports are reduced with a real appreciation of the renminbi. By estimating
bilateral import equations, we find that it is imports from other Southeast
Asian countries which fall. This result reflects the vertical integration
of Southeast Asia with China through the 'Asian production network'. We
find, in turn, that imports from Germany – which serve China’s domestic
demand – behave as one would expect, ie they increase with renminbi real
appreciation. All in all, our results raise concerns on the impact of
renminbi appreciation on Southeast Asia even if regional currencies do not
follow the renminbi’s upward trajectory.
Keywords: China; trade; exports; real exchange rate; (follow links to similar papers)
JEL-Codes: F10; F14; (follow links to similar papers)
40 pages, March 19, 2007
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