Citations: Wang Yaqi and Yu Miaojie, "The Impact of Exchange Rates on the Export Share of China's Processing Trade: A Market Demand Perspective", World Economy, No. 10, 2021, pp. 57-77.
About the Author:
Wang Yaqi graduated from the National Institute of Development studies of Peking University in 2015 with a Ph.D. in economics. He is currently an associate professor at the School of Finance of the Central University of Finance and Economics and a researcher at the International Finance Research Center of the Central University of Finance and Economics.
Yu Miaojie is a professor at the National Institute of Development Studies of Peking University, a liberal arts distinguished professor at Peking University, a Jiang Scholar Distinguished Professor of the Ministry of Education, a recipient of the National Outstanding Youth Fund, and an outstanding young scientist in Beijing.
Abstract: Based on the data of customs subdivisions, products and destinations, this paper studies the characteristics and trends of the change of processing trade share in China's export structure. Data analysis indicates that the export share of processing trade has declined significantly since 2005. This paper proposes that the theoretical mechanism of exchange rate changes affecting the export share of China's processing trade is that exchange rate changes lead to changes in market demand and export profits under the general trade and processing trade model, thus affecting the choice of trade mode of export enterprises. Empirical research has found that the appreciation of the renminbi will bring about a decline in the share of China's export processing trade, and the decline in the share of processing trade exports is more obvious in industries with relatively large foreign demand. Benchmark conclusions hold true for a range of robustness tests.
Keywords: processing trade export share exchange rate changes exchange rate elasticity market demand
introduction
The report of the 19th National Congress of the Communist Party of China in 2017 proposed to further deepen the reform of exchange rate marketization. With the improvement of the RMB exchange rate marketization formation mechanism, the fluctuation range of the RMB exchange rate has gradually expanded. In the context of the marketization of the RMB exchange rate, the impact of exchange rate fluctuations on China's import and export trade has received widespread attention and research, and one of the policy focuses discussed is the impact of exchange rate fluctuations on export enterprises with different trade models. This article discusses the impact of exchange rate movements on the choice of trade patterns of Chinese export enterprises. On this basis, we further assess the impact of exchange rate changes on China's export share of processing trade.
1. Typical facts
Based on the data of China Customs import and export transactions, we summarize some typical facts about the change in the export share of China's processing trade and the growth rate of exports. First, the time trend of the change in the export share of China's processing trade is described at the destination, enterprise and enterprise-destination levels. We find that China's export share of processing trade at the aggregate level fell from 57% in 2002 to 48% in 2011, and the downward trend is very obvious after 2005. Since the empirical study in this paper uses only a manufacturing sample, we further base our statistical description on a sample of manufacturing companies. The results found that at the enterprise or enterprise-destination level, the average share of exports of processing trade by enterprises fell by slightly more than 20 percentage points from 2002 to 2011.
Second, the impact of exchange rate changes on the export share of enterprises' processing trade
First of all, from the perspective of market demand, we analyze why exchange rate changes will have a differentiated impact on the general trade and processing trade exports of enterprises, thereby affecting the export share of processing trade of enterprises. Exchange rate changes will affect the relative profits of export enterprises in processing trade and general trade models by affecting the scale of foreign demand, thus affecting the choice of trade models of enterprises. Exporters who enjoy tariff reductions on intermediate goods in processing trade are not allowed to sell their products to the domestic market. Take the appreciation of the local currency as an example. The appreciation of the local currency is equivalent to the reduction of foreign demand faced by the enterprise, so the profit of exporting through general trade will rise relative to the export profit of processing trade at this time. For export enterprises, in the face of local currency appreciation, they will choose more to export with general trade or withdraw from the export market.
Specifically, this paper proposes and tests the following three hypotheses:
Hypothesis 1: When the local currency appreciates (depreciates), the export share of processing trade will decline (rise) relatively at the firm-destination level.
Hypothesis 2: Since processing trade products cannot be sold domestically, when the local currency appreciates (depreciates), the share of processing trade exports of enterprises located in industries with relatively large foreign demand falls (rises) more.
Hypothesis 3 When the local currency appreciates (depreciates), enterprises will withdraw (enter) the export market of processing trade more often. The appreciation of the local currency will transform the enterprise from the processing trade export to the general trade export or withdraw from the export market, while the depreciation of the local currency will convert the enterprise from the general trade export to the processing trade export or enter the export market.
III. Conclusion
In summary, this paper explains for the first time the changes in the export share of China's processing trade in recent years from the perspective of exchange rate changes. We find that exchange rate movements can significantly affect the share of processing trade exports: when the RMB exchange rate appreciates, the share of China's processing trade exports declines; the share of processing trade exports of enterprises located in industries with relatively large foreign demand falls more. This study shows that changes in exchange rate prices will affect the participation mode of enterprises in the domestic and foreign economic cycles by causing changes in the scale of domestic and foreign demand, and also reveal that changes in the RMB exchange rate have a strong structural adjustment effect on China's balance of payments. Therefore, when using the RMB exchange rate policy to adjust the current account surplus, the government should consider the exchange rate elastic difference of the import and export amount of different trade models to improve the effectiveness of the exchange rate policy.
Originally published in "The World Economy"
Author: Wang Yaqi Yu Miaojie
Read more
Yu Miaojie Jin Yang Liu Yalin | The origin and countermeasures of Sino-US trade frictions
Professor Yu Miaojie's new book "China's Economy under the New Development Pattern" was published
Yu Miaojie | Under the new development pattern, global value chain cooperation should be deepened
Yu Miaojie Jin Yang | The current situation, causes and consequences of overcapacity and response
Yu Miaojie | The two changes of the Canton Fair are the embodiment of building a new pattern of comprehensive opening up
Yu Miaojie, Jin Yang, Zhang Rui, | Capacity utilization rate measurement and productivity estimation of industrial enterprises
"People's Daily" published an article signed by Professor Yu Miaojie: Speeding up the improvement of the socialist market economic system
Yu Miaojie | Digital trade is becoming an opportunity for China to "overtake in a corner"
Yu Miaojie | The renminbi will appreciate for a long time, with it expected to appreciate to 6.1 against the dollar next year
Yu Miaojie | The 4th EU-China Talent Forum was successfully held with a focus on stimulating the vitality of global talent innovation
Yu Miaojie | The Canton Fair emphasized equal emphasis on exports and imports, reflecting China's continuous promotion of comprehensive opening up
New book delivery
| China's economy under the new development pattern |
By Yu Miaojie
Science Press
Edit | Cao Jian
✬ If you like this article, welcome to share ✬