Industry‐specific Real Effective Exchange Rate for China: 2000–2009

Abstract

AbstractThis paper measures the industry‐specific real effective exchange rate (REER) for China by matching domestic and foreign industry‐level price and trade data series. We find that after 2005 the REER appreciates more in the “chemical, plastics, rubber and fuels industry” and the “machinery and equipment industry,” but remains roughly constant or even depreciates in other industries. The nominal exchange rate generally accounts for over 50 percent of the aggregate real effective exchange rate fluctuations, but this conclusion does not apply to three of nine industries. We apply the industry‐specific REER to re‐examine the relationship between the exchange rate and trade, and find that the industry‐specific REER index performs better than the traditional aggregate REER index. We recommend that the Chinese Government officially adopt industry‐specific exchange rates instead of using the aggregate effective exchange rates to evaluate the competitiveness of Chinese industries in the international market.