Exchange Rates and the Margins of Trade: Evidence from Chinese Exporters

Hong Kong Institute for Monetary Research Working Paper No. 39/2011

33 Pages Posted: 1 Jan 2012

See all articles by Heiwai Tang

Heiwai Tang

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); The University of Hong Kong - Faculty of Business and Economics; CESIfo; Kiel Institute for the World Economy

Yifan Zhang

Sun Yat-Sen University (SYSU) - Department of Economics

Date Written: December 28, 2011

Abstract

This paper studies how real exchange rate movements affect firm export behavior, using monthly data that cover the universe of Chinese export transactions over the period of 2000-2006. Specifically, we examine exchange rate effects on an exporter's extensive (entry, exit, and product churning) and intensive margins of exports. We find significant effects on the extensive margin. A 10% real appreciation of the renminbi is associated with a 1 percentage-point decline in the probability of entry, and a 0.2 percentage-point increase in the probability of exit. The effects among foreign-invested enterprises almost double for both entry and exit. Despite the seemingly large effect on the extensive margins, exchange rates alone can only explain about 4% of entries and about 1.6% of exits during the sample period. The exchange-rate elasticity of exports is estimated to be around 0.4 in the first year after the shock, with most of the adjustment taking place in the first six months. This finding of a relatively fast response to exchange rate shocks is consistent with anecdotal evidence about intense competition in the Chinese export sectors.

Keywords: Exchange Rates, Pass-Through, Margins of Trade, Export Participation, Product Churning

JEL Classification: F14, F31, F32

Suggested Citation

Tang, Heiwai and Zhang, Yifan, Exchange Rates and the Margins of Trade: Evidence from Chinese Exporters (December 28, 2011). Hong Kong Institute for Monetary Research Working Paper No. 39/2011, Available at SSRN: https://ssrn.com/abstract=1977375 or http://dx.doi.org/10.2139/ssrn.1977375

Heiwai Tang (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

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The University of Hong Kong - Faculty of Business and Economics ( email )

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CESIfo ( email )

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Kiel Institute for the World Economy ( email )

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Yifan Zhang

Sun Yat-Sen University (SYSU) - Department of Economics ( email )

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Tuen Mun, NT
Hong Kong

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