The Effect of Exchange Rates on Chinese Trade: A Dual Margin Approach

Abstract

Previous studies investigating the effect of exchange rate changes on a country's exports have found little evidence that exchange rates matter. This "Exchange Rate Disconnect Puzzle" may stem from the fact that studies have mostly focused on aggregate data. We analyze the effect of real exchange rate fluctuations of the RMB by decomposing Chinese trade into its "extensive" and "intensive" margins using product-level data. Contrary to recent empirical evidence on the insignificant effects of exchange rate changes on trade, we estimate that real appreciation of the RMB has a significantly negative impact on Chinese exports. We also find that the major channel of effect is via the extensive margin. There is only weak evidence to indicate that imports are affected by exchange rates. With respect to exchange rate volatility, we generally find that it is negatively associated with exports, with no significant effect on imports. There appear to be major differences across China's major and non-major trading partners. Most of the exchange rate effects that we estimate are with China's non-major trading partners.

Examining the determinants and efficiency of China’s agricultural exports using a stochastic frontier gravity model

“…The United States of America has criticized China's exchange rate policy for the two country's bilateral trade deficit [73][74][75]. Evidence indicates that exchange rate volatility harms exports both in the short-and-long run [8,76]. Thus, our result is supportive of prior studies.…”

“…China, being the world's second-largest economy, has a significant impact on global trade patterns and the global economy [4,5]. Since its transformation into the global fastest rising economy, China has made remarkable changes in its export structure [6][7][8]. China's structural changes began in 1978, when the country started its economic reform and opening-up program.…”

The Nexus between Usd Parity and Trade Balance of BRICS-T Countries

“…Using a panel of 25 years of quarterly data, Chit et al (2010) found that currency volatility had a detrimental effect on the exports of five emerging East Asian economies (China, Indonesia, Malaysia, Philippines, Thailand). Real exchange rate volatility has been proven to have a major impact on overall Chinese exports, operating at both the extensive and intensive margins of trade (Qiu et al, 2020).…”