Processing Trade, Exchange Rates and China’s bilateral Trade Balances

Yuqing Xing

No 10-30, GRIPS Discussion Papers from National Graduate Institute for Policy Studies

Abstract: This paper analyzed the role of processing trade in China’s bilateral trade balances and the impact of the yuan’s appreciation on processing trade. The analysis is based on a panel data covering China’s 51 major trading partners from 1993-2008. The empirical analysis shows that: (1) processing trade accounted for 100% of China’s overall trade surplus and could explain most of China’s bilateral trade balances; (2) China’s processing trade shows a significant regional bias. While China has maintained a surplus with all G-7 countries in processing trade, it has run a significant deficit with most of East Asian economies; (3) East Asian economies are major sources and account for 77% of China’s processing imports. The econometric analysis reveals that processing imports from East Asian is eleven times of that from other regions; (4) the response of processing imports to the yuan’s appreciation differs with that of normal trade. Specifically, a 10% real appreciation of the yuan will reduce rather than increase China’s processing imports by 3.9%. Given that processing exports will decrease 9.6% for the same appreciation and China’s trade surplus is mainly generated from processing trade, a moderate appreciation of the yuan would have a very limited impact on China’s trade balance.

Keywords: Processing Trade; Exchange Rates; China (search for similar items in EconPapers)
Pages: 22 pages
Date: 2011-01
New Economics Papers: this item is included in nep-int, nep-sea and nep-tra
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Citations: View citations in EconPapers (12)

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Journal Article: Processing trade, exchange rates and China's bilateral trade balances (2012)
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