Processing Trade, Exchange Rates and China's Bilateral Trade Balances

National Graduate Institute for Policy Studies Discussion Paper No. 10-30

24 Pages Posted: 23 Jan 2011

See all articles by Yuqing Xing

Yuqing Xing

National Graduate Institute for Policy Studies

Date Written: January 23, 2011

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 balances.

Keywords: Processing Trade, Exchange Rates, China

JEL Classification: F1

Suggested Citation

Xing, Yuqing, Processing Trade, Exchange Rates and China's Bilateral Trade Balances (January 23, 2011). National Graduate Institute for Policy Studies Discussion Paper No. 10-30. Available at SSRN: https://ssrn.com/abstract=1745862 or http://dx.doi.org/10.2139/ssrn.1745862

Yuqing Xing (Contact Author)

National Graduate Institute for Policy Studies ( email )

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