Exchange Rate Policy: A Disguised Determinant of China’s Trading Partners

Abstract

The study examined the role of Chinese official exchange rate in the selection process of china’s trading regions. Interestingly, it is found that the Chinese exchange rate is an important determinant of the trade shifting from one region to another. This is done through employing macroeconomic modelling based on error correction equations. For this, China’s exports and imports are divided into 20 categories through 20 separately estimated short run and long run equations. The annual dataset is taken from W.D.I databank for the period 1908-2016. As a popular suggestion from different institutions, it was examined that how the appreciation of Chinese currency would affect the convergence (divergence) of China’s trade towards (from) a particular region? Also, the outcome comparison between one time appreciation and gradual appreciation of exchange rate is also examined. It is found that besides inter regional and international political factors, Chinese exchange rate gradually diverge China’s trade from high income economies and middle- and low-income economies in Europe and Central Asia to the other regions. The exchange rate appreciation will reduce the pace of this divergence (and convergence to the other regions). The magnitude of reduction in pace is greater in case of a onetime appreciation of currency as compared to the gradual appreciation.