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Can the chinese trade surplus be reduced through exchange rate policy?

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  • Garcia-Herrero, Alicia
  • Koivu, Tuuli

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.

Suggested Citation

  • Garcia-Herrero, Alicia & Koivu, Tuuli, 2007. "Can the chinese trade surplus be reduced through exchange rate policy?," BOFIT Discussion Papers 6/2007, Bank of Finland Institute for Emerging Economies (BOFIT).
    • Handle: RePEc:zbw:bofitp:bdp2007_006
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    Cited by:

    1. Cheung, Yin-Wong & Chinn, Menzie D. & Qian, XingWang, 2012. "Are Chinese trade flows different?," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2127-2146.
    2. Ana Cardoso & António Portugal Duarte, 2017. "The impact of the Chinese exchange policy on foreign trade with the European Union," Brazilian Journal of Political Economy, Center of Political Economy, vol. 37(4), pages 870-893.
    3. Kozluk, Tomasz & Mehrotra, Aaron, 2008. "The impact of Chinese monetary policy shocks on East Asia," BOFIT Discussion Papers 5/2008, Bank of Finland Institute for Emerging Economies (BOFIT).

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    More about this item

    Keywords

    China; trade; exports; real exchange rate;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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