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Real Exchange Rate in China : A Long-run Perspective

Author

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  • Haihong Gao

    (Institute of World Economics and Politics)

Abstract

This paper investigates the RMB exchange rate from a long-run viewpoint. Whether Chinas rapid economic growth brought about real exchange rate appreciation between 1975 and 2002 is empirically examined, based on a supply-side model, the BalassaSemuelson Hypothesis (BSH). The same test is conducted on Japan, Hong Kong, Korea, Malaysia, Singapore, Thailand, the Philippines, Indonesia and India. Our result indicates that the BSH only exists where the industrial structure has been upgraded and the economy has been successfully transformed from an agricultural economy to a manufacturing economy. Interestingly, China, among those where the BSH does not present, appears to be upgrading its industrial and trade structure. We then try to answer the question of why past rapid growth has no significant relationship with the RMB real exchange rate and what factors are underlying the trend of the RMB real exchange rate. We expect an appreciating trend of RMB real exchange rate in the foreseeable future, presuming that Chinas industrial upgrading process continues and the factors pertaining to the BSHs prediction, such as rise of wage rates in both tradables and nontradables, become more significant.

Suggested Citation

  • Haihong Gao, 2006. "Real Exchange Rate in China : A Long-run Perspective," Macroeconomics Working Papers 21969, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:macroe:21969
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    File URL: http://www.eaber.org/node/21969
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    References listed on IDEAS

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    1. Mohammad Hashem Pesaran & Yongcheol Shin & Richard J Smith, 1999. "Bounds Testing Approaches to the Analysis of Long Run Relationships," Edinburgh School of Economics Discussion Paper Series 46, Edinburgh School of Economics, University of Edinburgh.
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    3. Ronald I. McKinnon, 2006. "Exchange Rate or Wage Changes in International Adjustment? Japan and China versus the United States," Chapters, in: Lawrence R. Klein & Tayyeb Shabbir (ed.), Recent Financial Crises, chapter 8, Edward Elgar Publishing.
    4. Ms. Tao Wang, 2004. "China: Sources of Real Exchange Rate Fluctuations," IMF Working Papers 2004/018, International Monetary Fund.
    5. Frankel, Jeffrey, 2004. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adustment under a Flexible Rate," Working Paper Series rwp04-037, Harvard University, John F. Kennedy School of Government.
    6. World Bank, 2005. "World Development Indicators 2005," World Bank Publications - Books, The World Bank Group, number 12426.
    7. Xiaming Liu & Haiyan Song & Peter Romilly, 1997. "An empirical investigation of the causal relationship between openness and economic growth in China," Applied Economics, Taylor & Francis Journals, vol. 29(12), pages 1679-1686.
    8. World Bank, 2005. "World Development Indicators 2005," World Bank Publications - Books, The World Bank Group, number 12425.
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    Cited by:

    1. XU, Yingfeng, 2009. "Relevant international experience of real exchange rate adjustment for China," China Economic Review, Elsevier, vol. 20(3), pages 440-451, September.

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    More about this item

    Keywords

    RMB real exchange rate; economic growth;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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