Impact of RMB exchange rate fluctuations on China’s processing trade: the amplification effect of rising ratio of domestic value

SU Lifeng1 PENG Fei2

(1.School of Finance, Shanghai Lixin University of Commerce 201620)
(2.School of International Economics and Trade, Shanghai Lixin University of Commerce 201620)

【Abstract】Most studies suggest that the domestic value added rate of China’s processing trade is relatively low, so the effect of RMB appreciation on the processing-trade imports and exports with “both ends out” is not obvious. Through calculation, the authors find that the ratio of domestic value of China’s processing trade has been on the rise in the past 20 years, and that changes in ratio of domestic value must be taken into consideration in order to correctly assess the impact directions and degrees of RMB exchange rate on processing-trade imports and exports. In this paper, the empirical tests prove that RMB appreciation can drastically reduce processing-trade imports and exports with the long-term elasticity being −1.5 and −1.0 for them respectively. Further, because the impacts of RMB appreciation on foreign value and domestic value of export commodities in processing trade are opposite, different ratios of domestic value will change exchange rate elasticity values of processing-trade imports and exports. With the rise in ratio of domestic value in China, such exchange rate elasticity values during the sample period experienced changes from positive to negative and then increasingly growth; the export elasticity and import elasticity in 1995 were 0.4 and 0.5, respectively, and −2.0 and −1.4 in 2014, respectively.

【Keywords】 processing trade; RMB exchange rate; ratio of domestic value; dynamic ordinary least squares;

【DOI】

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(Translated by ZHANG Xiaoyan)

    Footnote

    [1]. ① Only in the form of processing with imported materials, will traders conduct real payments. Assuming that traders can fully anticipate RMB exchange rate appreciation, they definitely adopt some methods to utilize the “advantages” of appreciation for profits, such as postponing payment and collecting foreign exchange in advance. [^Back]

    [2]. ① As 95% of China’s export products are final products, CPI is a better index compared with PPI. [^Back]

    [3]. ② The 17 countries are Canada, the US, Turkey, Belgium, Denmark, the UK, France, Italy, the Netherlands, Portugal, Spain, Finland, Hungary, Norway, Poland, the Czech Republic and the Slovak Republic. [^Back]

    [4]. ③ Although China has trade deficits with these five counties for several years, mainly because China imports a lot of high-tech products from these countries, actually, these five countries are also major import countries of China’s processing-trade products. [^Back]

    [5]. ① The fixed base PPI index is calculated by PPI sequential growth rates in all months of 2005 in China. [^Back]

    [6]. ① Due to space limitations, the authors no longer make statistical descriptions of other original data. [^Back]

    [7]. ① Due to space limitations, the test results are not reported, which are available upon request. [^Back]

    [8]. ② Due to space limitations, the test results are not reported, which are available upon request. [^Back]

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This Article

ISSN:1002-8102

CN: 11-1166/F

Vol 37, No. 07, Pages 107-120

July 2016

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Article Outline

Abstract

  • 1 Introduction and literature review
  • 2 Theoretical model and measurement method
  • 3 Estimation of the ratio of domestic value in China’s processing trade
  • 4 Empirical test and result analysis
  • 5 Robustness test and further discussion
  • 6 Conclusion and policy implication
  • Footnote

    References