How Would an Appreciation of the Yuan Affect the People's Republic of China’s Surplus in Processing Trade?

22 Pages Posted: 12 Jul 2010  

Willem Thorbecke

Asian Development Bank Institute

Date Written: June 18, 2010

Abstract

Enormous trade surpluses are problematic for the People’s Republic of China (PRC) and the rest of the world. They primarily stem from processing trade. This paper investigates how exchange rate changes would affect the PRC’s imports for processing and processed exports. The results indicate that an appreciation throughout East Asian supply chain countries would reduce the PRC’s surplus in processing trade, while an appreciation of the yuan alone might not. Even for an appreciation throughout East Asia, however, the sum of the exchange rate elasticities is not large. Thus, to rebalance the PRC’s trade, exchange rate appreciations must be accompanied by other changes such as factor market liberalization and greater enforcement of environmental regulations.

Keywords: Global imbalances, exchange rate elasticities, People’s Republic of China

JEL Classification: F32, F41

Suggested Citation

Thorbecke, Willem, How Would an Appreciation of the Yuan Affect the People's Republic of China’s Surplus in Processing Trade? (June 18, 2010). ADBI Working Paper No. 219. Available at SSRN: https://ssrn.com/abstract=1638782 or http://dx.doi.org/10.2139/ssrn.1638782

Willem Thorbecke (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F 3-2-5
Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

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