Impact of RMB exchange rate fluctuations on China’s processing trade: the amplification effect of rising ratio of domestic value
(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;
(Translated by ZHANG Xiaoyan)
. 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]
. ① As 95% of China’s export products are final products, CPI is a better index compared with PPI. [^Back]
. 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]
. 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]
. ① The fixed base PPI index is calculated by PPI sequential growth rates in all months of 2005 in China. [^Back]
. ① Due to space limitations, the authors no longer make statistical descriptions of other original data. [^Back]
. ① Due to space limitations, the test results are not reported, which are available upon request. [^Back]
. ② Due to space limitations, the test results are not reported, which are available upon request. [^Back]
1. Chen, X., Liu, M. & Dong, Y. Fudan Journal (Social Sciences Edition) (复旦学报(社会科学版)), (6) (2007)
2. Li, H. Journal of International Trade (国际贸易问题), (5) (2008)
3. Li, L. Intertrade (国际贸易), (2) (2012)
4. Liu, R., Zhou, J. & Xu, X. Economic Research Journal (经济研究), (5) (2010)
5. Ma, G. & Deng, L. Finance & Trade Economics (财贸经济), (12) (2012)
6. Sun, S., Qiu, B., Tang, B. et al. Forum of World Economics & Politics (世界经济与政治论坛), (2) (2014)
7. Wang, Y. & Zhang, M. Journal of Financial Research (金融研究), (3) (2014)
8. Xing, Y. Journal of Financial Research (金融研究), (2) (2012)
9. Xu, J. & Fang, Q. Journal of International Trade (国际贸易问题), (11) (2013)
10. Xu, Y. & Xu, K. Economic Theory and Business Management (经济理论与经济管理), (7) (2014)
11. Yang, B. Contemporary Finance & Economics (当代财经), (9) (2009)
12. Ahmed, S., Are Chinese Exports Sensitive to Changes in the Exchange Rate? International Finance Discussion Papers, No. 987, 2009, Federal Reserve Board, Washington, D.C. December.
13. Aziz, J. and Li, X., China’s Changing Trade Elasticities. China and World Economy, Vol. 16, No. 13, 2008, pp. 1–21.
14. Chen, Xikang and Leonard K. Cheng and K. C. Fung and Lawrence J. Lau and Yun-Wing Sung and Kunfu Zhu and Cuihong Yang and Jiansuo Pei and YuwanDuan, Domestic Value Added and Employment Generated by Chinese Exports: A Quantitative Estimation. China Economic Review, Vol. 23, 2012, pp. 850–864.
15. Cheung, Y.-W. and Chinn, M. and Qian, X.W., Are Chinese Trade Flows Different? Journal of International Money and Finance, Vol. 31, 2012, pp. 2127–2146.
16. DuanYuwan and Yang Cuihong, and Zhu Kunfu and Chen Xikang, Does the Domestic Value Added Induced by China’s Exports Really Belong to China? China & World Economy, Vol. 20, 2012, pp. 83–102.
17. Friedrich, R. J., In Defense of Multiplicative Terms in Multiple Regression Equations. American Journal of Political Science, Vol. 26, No. 4, 1982, pp. 797-833.
18. Garcia-Herrero, A. and Koivu, T., Can the Chinese Trade Surplus Be Reduced through Exchange Rate Policy? BOFIT Discussion Papers, No. 6, March 2007, Bank of Finland, Helsinki.
19. Goldstein M. and Khan, M. S., Income and Price Effects in Foreign Trade. In: Jones R. W. and Kenen P. B., (Eds.), Handbook of International Economics, Vol. II (1), 1985, pp. 1041–1105.
20. Hummels, D. and Ishii, J. and Yi, Kei-Mu, The Nature and Growth of Vertical Specialization in World Trade. Journal of International Economics, Vol. 54, 2001, pp. 75–96.
21. Koopman, R. and Wang, Z. and Wei, S. J., Estimating Domestic Content in Exports When Processing Trade is Pervasive. Journal of Development Economics, Vol. 99, 2012, pp. 178–189.
22. Marquez, J. and Schindler, J. W., Exchange-rate Effects on China’s Trade. Review of International Economics, Vol. 15, No. 5, 2007, pp. 837–853.
23. Montalvo, J. G., Comparing Cointegrating Regression Estimators: Some Additional Monte Carlo Results. Economics Letters, Vol. 48, No. 3-4, 1995, pp. 229–234.
24. Reinhart C. D., Devaluation, Relative Price, and International Trade. IMF Staff Paper, Vol. 42, 1995, pp. 290–312.
25. Schott, Peter K., The Relative Sophistication of Chinese Exports. Economic Policy, Vol. 23, 2008, pp. 5–49.
26. Stock, J. and Watson, M., A Simple Estimator of Cointegrated Vectors in Higher Order Integrated Systems. Econometrica, Vol. 61, 1993, 783–820.
27. Upward R. and Wang Z. and Zheng Jinghai, Weighing China’s Export Basket: The Domestic Content and Technology Intensity of Chinese Exports. Journal of Comparative Economics, Vol. 41, 2013, pp. 527-543.