Chinese Real Exchange Rate Research Articles

Excess Labor Supply, Structural Change and Real Exchange Rate

Since China joined the World Trade Organisation in 2001, the Chinese economy has grown rapidly, especially the tradable goods sector. However, the Chinese real exchange rate did not exhibit a persistent and stable appreciation until 2005. This is a puzzling fact that is inconsistent with theories. This paper documents several stylized facts during the economic transition and argues that two features of the Chinese economy may help explain the puzzling real exchange rate pattern for the Chinese economy: i) the faster total factor productivity (TFP) growth in the export sector compared with the import sector; and ii) excess supply of unskilled labor. We construct a small open economy model with an H-O trade structure. We show that, due to heterogeneous skilled labor intensity in export and import sectors, faster TFP growth in the export sector over that in the import sector will lead to the decline of return to capital and a rise of the skilled wage. Therefore, the decrease of return to capital and the persistent low unskilled wage, which is caused by the excess supply of unskilled labor, inhibit the rise in the relative price of non-tradable goods to tradable goods and the appreciation of the real exchange rate. Furthermore, we develop a dynamic small open economy model with multiple tradable goods sectors. We show that the model does fairly well in explaining the Chinese real exchange rate and other stylized facts in the economic transition. Finally, we demonstrate that our hypotheses are supported by cross-country evidence.

Structural changes and the real exchange rate dynamics

Since China joined the WTO in 2001, the Chinese economy has grown very rapidly, especially, the tradable goods sector. However, the Chinese real exchange rate did not exhibit a persistent and stable appreciation until 2005. This is a puzzling fact that is inconsistent with theories. This paper documents several stylized facts during the economic transition and argues that two features of Chinese economy may help explain the puzzling real exchange rate pattern for Chinese economy: (i) the faster total factor productivity (TFP) growth in export sector compared with the import sector; (ii) excess supply of unskilled labor. Our hypotheses are supported by cross-country evidence. Furthermore, we construct a small open economy model with an H-O trade structure and show that, due to heterogeneous skilled labor intensity in export and import sectors, the faster TFP growth in the export sector over that in the import sector will lead to the decline of return to capital and the rise of skilled wage. Therefore, the decrease of return to capital and the low unskilled wage, which is caused by the excess supply of unskilled labor, inhibit the rise in the relative price of non-tradable goods to tradable goods as well as the appreciation of real exchange rate. Finally, we show that a dynamic small open economy model with multiple tradable goods sectors does fairly well in explaining the Chinese real exchange rate and other stylized facts in the economic transition.

A Darwinian perspective on “exchange rate undervaluation”

This paper studies how status competition for marriage partners can generate surprising effects on the real exchange rate (RER). In theory, a rise in the sex ratio (increasing relative surplus of men) can generate a decline in the RER. The effect can be quantitatively large if the biological desire for a marriage partner is strong. We also provide within-China and cross-country empirical evidence to support the theory. As an application, our cross-country estimation suggests that sex ratio as well as other factors in the existing literature can account for the recent evolution in Chinese RER almost completely.

Global imbalances, current account rebalancing and exchange rate adjustments

Global imbalances pose a serious question for academia and policy makers related to its formation, sustainability and correction. In this paper we analyze the required adjustments of exchange rates for rebalancing in current accounts. We set up a two-country two-sector model for the US-China with two asymmetries. First, we assume that the size of China initially is one third of the US but its size becomes half in the next 10 years. Second, we assume that China initially runs a net export surplus. Then we quantitatively study two adjustment scenarios. First scenario, called Slow Adjustment, assumes that in the process of growth, Chinese demand composition moves more towards domestic non-tradable sector. In this case, Chinese real exchange rate appreciates gradually and net export surplus decreases slowly. Second scenario, called Quick Adjustment, assumes that net export surplus against US goes to zero quickly in five years. In this case, net export adjustment happens quickly and real exchange rates in China appreciate at a higher rate. Even though, global imbalances are eliminated faster in the Quick Adjustment case, high real appreciation in China hurts importers in the US. A comparison in terms of output shows that Slow Adjustments is preferred for both countries.

The export response to exchange rates and product fragmentation: the case of Chinese manufactured exports

This paper examines how changes in the Chinese real exchange rate affect China's exports in the context of global production networks. It highlights the misspecification inherent in conventional export models and the importance of distinguishing between the very different impacts of exchange rate changes relative to export destinations and those relative to sources of parts and components. Our empirical estimates cast further doubts on the effectiveness of Chinese exchange rate adjustments for reducing Chinese export volumes.

Spatial panel data analysis with feasible GLS techniques: An application to the Chinese real exchange rate

Recent panel data approaches stress the importance of the location interdependence. Little has been done in the Balassa–Samuelson literature accounting for spatial dependence in the panel data context that allows for spatial autocorrelation. By utilising the recently developed Kapoor et al. (2007) spatial panel feasible GLS methods, we find that the Balassa–Samuelson effect in the Chinese economy during 1985 until 2000 generally does not appear to hold. However, the black market exchange rate tends to be more compatible with the theory.

Are Chinese Exports Sensitive to Changes in the Exchange Rate?

This paper builds a model of two types of Chinese exports, those processed and assembled largely from imported inputs ( processed exports) and non-processed exports. Based on this model, the sensitivity of Chinese exports to exchange rate changes is empirically examined. Unlike previous work, the estimation period includes the net real appreciation of the renminbi that has occurred over the past three years. The results show that greater exchange rate appreciation dampens export growth, both for non-processed and processed exports, with the estimated cumulative price elasticity being substantially greater than unity. When the source of the increase in the Chinese real exchange rate is appreciations against the currencies of other emerging Asian trading partners, the effect on processing exports is positive but insignificant, while the effect on non-processing exports is significantly negative. By contrast, when the source of the increase in the Chinese real exchange rate is appreciation against China's advanced-economy trading partners, the effects on both types of exports are negative. These results are consistent with the predictions of the theoretical model. Counterfactual simulations based on the estimated model strongly suggest that if the trade-weighted real renminbi had appreciated at an annual rate of 10 percent per quarter since mid-2005, Chinese real exports would have been roughly 30 percent lower today. Thus greater exchange rate flexibility could contribute to lowering China's huge trade surplus through restraining growth of exports.

Are Chinese Exports Sensitive to Changes in the Exchange Rate?

This paper builds a model of two types of Chinese exports, those processed and assembled largely from imported inputs (processed exports) and exports. Based on this model, the sensitivity of Chinese exports to exchange rate changes is empirically examined. Unlike previous work, the estimation period includes the net real appreciation of the renminbi that has occurred over the past three years. The results show that greater exchange rate appreciation dampens export growth, both for non-processed and processed exports, with the estimated cumulative price elasticity being substantially greater than unity. When the source of the increase in the Chinese real exchange rate is appreciations against the currencies of other emerging Asian trading partners, the effect on processing exports is positive but insignificant, while the effect on non-processing exports is significantly negative. By contrast, when the source of the increase in the Chinese real exchange rate is appreciation against China's advanced-economy trading partners, the effects on both types of exports are negative. These results are consistent with the predictions of the theoretical model. Counterfactual simulations based on the estimated model strongly suggest that if the trade-weighted real renminbi had appreciated at an annual rate of 10 percent per quarter since mid-2005, Chinese real exports would have been roughly 30 percent lower today. Thus greater exchange rate flexibility could contribute to lowering China's huge trade surplus through restraining growth of exports.

China's economic growth and its real exchange rate

The shocks that underlie China's comparatively rapid growth include gains in productivity, factor accumulation and policy reforms that increase allocative efficiency. The well-known Balassa–Samuelson hypothesis links productivity growth in tradable industries with real appreciations. Yet it relies heavily on the law of one price applying for tradable goods, against which there is now considerable evidence. In its absence, other growth shocks also affect the real exchange rate by influencing relative supply or demand for home product varieties. This paper investigates the pre-conditions for the Balassa–Samuelson hypothesis to predict a real appreciation in the Chinese case. It then quantifies the links between all growth shocks and the Chinese real exchange rate using a dynamic model of the global economy with open capital accounts and full demographic underpinnings to labor supply. The results suggest that financial capital inflows most affect the real exchange rate in the short term, while differential productivity is strong in the medium term. Contrary to expectation, in the long term demographic forces prove to be weak relative to changes in the skill composition of the labor force, which enhances services sector performance and depreciates the real exchange rate.

Can Renminbi Appreciation Reduce the US Trade Deficit?

AbstractUsing a computational general equilibrium model, we analyze the impacts of Chinese real exchange rate appreciation on the trade balance of China and the USA and on various industries of both countries. We use several scenarios with 2.1, 6 and 12 percent real exchange rate appreciations for our simulation analysis. The results indicate that China's exchange rate appreciation might not solve the enlarging US current account deficits. Chinese outputs in both primary and manufacture sectors will increase, whereas the outputs of energy and services sectors will be adversely affected. The price of value‐added products declines in light of the renminbi appreciation.(Edited by Zhinan Zhang)