Can the chinese trade surplus be reduced through exchange rate policy?

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Title: Can the chinese trade surplus be reduced through exchange rate policy?
Author: Garcia-Herrero, Alicia ; Koivu, Tuuli
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 6/2007
Year of publication: 2007
Publication date: 19.3.2007
Published in: Published in Economie Internationale, Volume 116, Issue 4, 2008, Pages 53-92 as China's exchange rate policy and asian trade
Pages: 36 s.
Keywords: Kiina; ulkomaankauppa; valuuttakurssit; vaikutukset; valuuttapolitiikka; vienti; tuonti; Bofit-kokoelma; ylijäämä
JEL: F14
Abstract: This paper shows empirically that China's trade balance is sensitive to fluctuations in the real effective exchange rate of the renminbi, although the size of the surplus is such that exchange rate policy alone will be unable to address the imbalance. One of the main reasons why the reduction in the trade surplus is limited is that Chinese imports are reduced with a real appreciation of the renminbi.By estimating bilateral import equations, we find that it is imports from other Southeast Asian countries which fall.This result reflects the vertical integration of Southeast Asia with China through the 'Asian production network'.We find, in turn, that imports from Germany - which serve China's domestic demand - behave as one would expect, ie they increase with renminbi real appreciation.All in all, our results raise concerns on the impact of renminbi appreciation on Southeast Asia even if regional currencies do not follow the renminbi's upward trajectory. Keywords: China, trade, exports, real exchange rate JEL classification: F1, F14

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