YUAN REVALUATION & CHINESE TEXTILE INDUSTRY

Yuan Revaluation & Chinese Textile Industry

Table of Contents

Introduction3

China's exchange rate and triad trade9

Literature Review12

Data, econometrics, and results21

Data21

The Sino-U.S. estimates25

The Sino-Japan estimates36

Additional robustness checks40

Estimates using data on different periods40

Estimates using 2SLS approach46

Conclusion49

References51

Introduction

After China acceded to the World Trade Organization (WTO) in 2001, China's trade items expanded dramatically. The annual trade items development rate was 20.1% all through 2002-2007. China's trade items to Japan and the United States, the two biggest swapping finances in the world, furthermore expanded very quickly. Specifically, China's trade items to the U.S. expanded from U.S.$ 53.2 billion to U.S.$ 232.7 billion, a 29.5% annual development rate all through this period. By way of evaluation, China's trade items to Japan expanded from U.S.$ 48.4 billion to U.S.$ 102.0 billion, a 14.9% annual development rate all through this period. Simultaneously, the exchange rate of Chinese Yuan (RMB) against U.S. dollar altered by around 20% all through this time span due to revaluation. As shown in Fig. 1, after the RMB's revaluation against U.S. dollar in 2005, the percentage of China's trade items to the U.S. contrasted with China's general trade items capability chased a down high ground inclination while that of China's trade items to Japan proceeded to decrease. It is therefore intriguing to inquire if the revaluation of the RMB revaluation is decreased bilateral trade amidst China, Japan and the U.S.

Fig. 1. Bilateral trade and the exchange rate: China and Japan. CEIC Database (2008).

This paper hunts for to realise the endogenous nexus between the movements of the bilateral exchange rates and bilateral trade in the middle of the triad: China, Japan and the U.S. The intuition appears straightforward: the boost in RMB valuation against the U.S. dollar produced in more costly Chinese trade items to the U.S., which in turn declined China's trade items to the U.S. However, there is a more rudimentary means underlying this accepted wisdom: the bilateral exchange rate is not exogenous itself. Surging Chinese trade items could outcome in powerful force to defend markets increased by the import-competing exceptional interest assemblies in the trading country. Accordingly, the government in the trading homeland would impel the exporting homeland to revalue its exchange rate. Put another way, trade items have a turn around causality on bilateral exchange rates. Ignoring this detail may make estimation outcomes imprecise.

Previous investigations have paid little alertness to this two-way causality. Most only mention one of the two causal connections. Some works aim on the influence of the bilateral exchange rate on bilateral trade, particularly through the pass-through effect of the exchange rate (Goldberg & Knetter, 1997). When the nominal bilateral exchange rate is altered, it has a pass-through effect on the cost of the trades, which in turn would sway bilateral trade. Previous investigations like Feenstra (1989) find empirical clues that the effect of the bilateral exchange rate on bilateral trade is like that of a tariff. Bergin and Feenstra (2009) furthermore discovered how a change in the share of ...