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2014
© Trade Science Inc.
ISSN : 0974 - 7435 Volume 10 Issue 20
BioTechnology
An Indian Journal
FULL PAPER
BTAIJ, 10(20), 2014 [12001-12006]
Study of the impact of RMB real exchange rate on
zhangzhou’s trade balance
Lin Wen
Straits Institute, Minjiang University, Fuzhou, Fujian, (CHINA)
ABSTRACT
With the monthly data of RMB real effective exchange rate and Zhangzhou’s trade
balance from Aug,2006 to Sep,2011, we make empirical analysis of each economic
variable relationship through establishing vector regression models. The result indicates
that the RMB real effective exchange rate and Zhangzhou’s trade balance has the longterm cointegration relationship, but the relationship is not very significant. In other words,
the RMB real exchange rate is not the main factor to affect the Zhangzhou’s trade balance.
It’s not obvious to improve the Zhangzhou’s trade balance through exchange rate balance.
KEYWORDS
RMB real exchange rate; Zhangzhou; Trade balance.
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12002 Study of the impact of RMB real exchange rate on zhangzhou’s trade balance BTAIJ, 10(20) 2014
INTRODUCTION
Zhangzhou City, located in the southeast of Fujian Province, its east is near the Taiwan Strait and in the opposite of
Taiwan Province. Its northeast, Quanzhou and Xiamen are together and are known as the “Golden Triangle of South Fujian”.
Its northwest bordering with Longyan and its southern is next to Guangdong, Shantou and Chaozhou, it is famous as “the
hometown of fish and goods”. It is famous of overseas Chinese and the ancestral home. At present, Zhangzhou people are
seizing the opportunity of reform and opening and are active in the construction of the West Coast Economic under the lead
of government. It has carried out the development strategy that “industry setting up city” to accelerate the economic growth
rate, to build ecological industry and trade port city and to enhance the ability to participate in the international competition.
Under the call of the government policy, Zhangzhou has achieved huge development on economic. It has achieved a GDP of
176.82 billion yuan, which is 14.7% more than the previous year until 2011. In terms of the import and export, in the ten
years from 2000 to 2011, the average growth rate of import and export is 24.62% every year in which 2003 is 69.09%, 2004
is 56.58 and 2010 is 54.19% and they are rapid particularly. Total imports and exports in 2010 reached up to 7399 million
U.S dollars that is 54.19% more than 2009. According to the whole information, we can see generally that the improvement
of foreign trade has promoted the rapid development of Zhangzhou’s economy.
The foreign trade dependency of Zhangzhou is 32.77% in recent ten years. It can be seen that the impact of RMB
exchange rate on Zhangzhou’s foreign trade balance can not be ignored. It goes without saying that it’s necessary and
important to study on the relationship between RMB exchange rate and Zhangzhou’s foreign trade balance.
LITERATURE REVIEW OF THE EMPIRICAL STUDY OF THE RMB EXCHANGE RATE AND CHINA'S
TRADE BALANCE
For now, elastic analysis method has been widely used to analyze the relation between exchange rate changes and the
international trade balance. Whether the Marshall-Lerner condition is established has been used in the study on the relation
between the country’s exchange rate and international trade balance by scholars from all over the world. There is a “elasticity
pessimism debate” among theoretical cycle o12002n whether exchange rate changes have influence on international trade
balance. In recent years, with the continued appreciation of RMB, many domestic scholars use whether the Marshall-Lerner
condition that the import demand elasticity adds export demand elasticity equals one is established to analyze the impact of
RMB exchange rate on Chinese international trade balance. At present, there is a big divergence between the research
conclusions and ideas. There are three main ideas:
Idea 1. There is a serious shortage of the price elasticity of demand for imports and exports, the Marshall-Lerner
condition is not established in China. As the analysis on the information 1970-1983 done by Li Yining (1991) shows,
Chinese price elasticity of demand for imports and exports is only 0.7377 that was a serious shortage of price elasticity of
demand. Xie Jianguo and Chen Ligao (2002)[1] used the cointegration analysis and impulse response method to study on the
relation between RMB real exchange rate and international trade balance. It turned out that the influence of RMB real
exchange rate on Chinese international trade balance was not significant. Zhou Hongshan and Li Qi (2007) used quarterly
data 1993-2004 to examine the relation between RMB exchange rate and the Sino-US trade. As the result shew, exchange
rate fluctuations had no significant effect on exports.
Idea 2. Chinese demand elasticity of imports and exports is the critical value. Using the exchange rate policy to adjust
Chinese trade balance has just a little effect. Chen Biaoru (1992) made a conclusion using data 1980-1989 that Chinese price
elasticity of demand for imports and exports is 1.0248, the depreciation of RMB had a limited effect on improving Chinese
trade balance. Shen Guobin and Yang Yi (2005)[5] carried out a study using monthly data 1990.01-2004.12, which shew that
it is a small mutual influence between RMB exchange rate and Chinese imports and exports in short -term and it is not a
stable cointegration relation in long-term. Zhao Xi and Li Bingyang (2006) made a study using data 1984-2004 on
Guangdong Province’s imports and exports, which shew that the influence of the fluctuation of RMB real exchange rate on
Guangdong Province’s imports and exports is very small.
Idea 3. The fluctuation of exchange rate has a long and obvious influence on Chinese trade balance. Lu xiangqian and
Dai Guoqiang (2005)[2] used cointegration vector auto-regression analysis method to analyze the long-term relationship
between RMB and the world’s major currencies weighted real exchange rate fluctuation from1994 to 2003 and Chinese
imports and exports. As the result shew, RMB real exchange rate fluctuation had an obvious influence on Chinese imports
and exports. What’s more, it exists the J-curve effect between them. Liu Xinxin (2005)[7] did a study using annual data about
RMB real exchange rate and Chinese trade balance from1979 to 2003, through which she made a conclusion that the main
reason that influence Chinese trade balance is RMB real exchange rate. Li Bohai (2003)[8] used cointegration analysis and
other analytical methods to made a research on data 1973-2001. The result shew that there is a long-term stable equilibrium
relationship between RMB real exchange rate and Chinese foreign trade.
However, there are still relatively little relevant research literature specific to Fujian Province. According to the
available information, Lin Youwen, Huang Jie and Song Baoding hold the view that there is no long-term equilibrium
relationship between RMB real exchange rate fluctuation and Chinese foreign trade; Han Ping and Ren Chunmei think that
RMB real exchange rate fluctuation has a tiny influence on Fujian province’s imports and exports. There is no relevant
research specific to Zhangzhou’s.
Based on the current different academic point of view and take into account the real effective exchange rare is more
representative compared to the norminal effective exchange rate, the article intends to use monthly data about RMB real
BTAIJ, 10(20) 2014 Lin Wen 12003
exchange rate from August, 2006 to September, 2011 and relative data to build econometric model and use Eviews 6.0 to do
empirical analysis. The article aims to do the research on the influence of the RMB real exchange rate fluctuation on
Zhangzhou’s trade balance.
EMPIRICAL ANALYSIS OF THE IMPACT OF RMB REAL EXCHANGE RATE FLUCTUATION ON
ZHANGZHOU’S TRADE BALANCE
(1)Characteristics of real exchange rate movements and trade balance of Zhangzhou
Since the reform and opening up, Chinese exchange rate system had mainly gone through two reformation. The first is
the unification of RMB exchange rate in 1994 that adopt a unified managed floating exchange rate system. The second is the
floating exchange rate system in July, 2005 which is a managed floating exchange rate regime based on market demand and
supply with reference to a basket of currencies. In order to observe the relationship between RMB real exchange rate and
Zhangzhou’s trade balance from the surface of data, the article adopt some annual datum from 1994 to 2010 about RMB
nominal effective exchange rate index, RMB real exchange rate index and Zhangzhou’s trade balance (Trade balance is
exports minus imports). The annual exchange rate index can be calculated by adding the monthly datum published by Bank
for International Settlements about RMB nominal effective exchange rate index and the RMB real exchange rate index and
get the average of them. What’s more, it is the result of normalization of 2005=100.
Among the samples, with the depreciation of RMB, the scale of trade surplus became larger in some years which
accorded with the traditional theory. However, with the appreciation of RMB, the scale of trade surplus became larger in
some years. For this paradox, this article is going to analyze whether there is a significant correlation between RMB real
exchange rate and Zhangzhou’s trade balance and find the reason for these phenomenon above.
(2)Empirical Analysis of the impact of RMB Real Exchange Rate Fluctuation on Zhangzhou’s Trade Balance
(a). Econometric model
International trade theory indicates that a country’s or a region’s international trade balance are mainly influenced by the
country’s or the region’s relative prices of import and export goods, the real income levels of consumers at home and abroad
and other economic variable. With this basis, the article refers to many scholars at home and abroad such as Xie Jianguo,
Chen Ligao,Bhamani,Rose and others analysis methods in order to analyze whether there is a long-run equilibrium
relationship between RMB real exchange rate and Zhangzhou’s trade balance.
The specific functional form can be represented as:
( , , )fTB f RER Y Y
TB represents a country or a region’s international trade balance; RER represents real exchange rate; Y represents the
country’s real income; Yf represents foreign country’s real income.
As the real effective exchange rate is more representative, the article chose the REER instead of the RER when
establishing econometric model. At the same time, all these datum series are seasonally adjusted and are converted to
exponential form. What’s more, in order to eliminate the effect of possible heteroscedasticity in the time series, the article
takes natural logarithm index of every variable sequence respectively. Trade balance measurement equation can be
represented as:
ln ln ln lnt t f t t tT B Y Y R E E R        
TBt represents the trade balance between Zhangzhou and main trading partner countries or regions in time t. Yt
represents the actual output. Yft represents the output of its main trading countries or regions. REER represents the RMB real
exchange rate.
(b)Sample data selection and processing
Chinese floating exchange rate system is managed which is based on the market supply and demand with reference to a
basket of currencies in 2005 after the exchange rate reform. Price changes can influence trade through market mechanism
theoretically. So it should use the data after July 2005 as the research object. However, because of the lack of monthly data, I
must extend the upper limit of the sample time interval to August 2006. The specific interval is the monthly data from August
2006 to September 2011 which are 62 samples totally.
RMB Real Effective Exchange Rate Index
Select the RMB real effective exchange rate instead of the real exchange rate and used the real effective exchange rate
index as indicator variables in this econometric model. The RMB real effective exchange rate datum from August 2006 to
September 2011 were released by the Bank for International Settlements. The statistics are adjusted as the corresponding
national CPI. What’s more, it is the result of indexation processing of 2005=100.
Selection of trading partners and determination of trade weights
The article selects 20 representative countries or regions as trading partners of Zhangzhou. They are America, Taiwan,
Japan, Korea, Hongkong, Germany, India, Malaysia, Australia, Thailand, Philippines, England, Canada, Singapore, Italy,
France, Spain, Finland, Denmark and Sweden. The reason why I choose these countries is that the Zhangzhou’s total trade
12004 Study of the impact of RMB real exchange rate on zhangzhou’s trade balance BTAIJ, 10(20) 2014
volume with the 20 countries and regions accounted for about 80% of the total annual trade volume which is representative
relatively. Zhangzhou’s import and export trade with each trading partner can be got through calculating the total trad volume
with its trading partners. The formula to calculate trade weight is
 


)M(X itit
itit
it MX
W
Wit represents the trade weight with sample trading partners in year t; Xit represents Zhangzhou’s exports of sample
trading partner i in year t; Mit represents Zhangzhou’s imports of sample trading partner i in year t. Each trade weight is
calculated by author. On account of the lack of data of year 2011, I filled it through tracing method.
Zhangzhou’s Trade Balance
Zhangzhou’s trade balance is the margin between its monthly total exports and monthly total imports. For the reason
that the trading data released by Zhangzhou Customs Net has not adjusted seasonally, I use seasonally adjusted tool --X12 to
adjust total imports and exports each month when doing econometric analysis. Then I get the trade balance --TB through
indexation processing of 2005=100.
Real income of Zhangzhou and its trading partner
In general, I choose a country or a region’s GDP as trading partner. Because the GDP only according to annual
statistics, the article chooses the added value of industrial monthly instead of GDP as the real income. Zhangzhou’s added
value of industrial data comes from Zhangzhou’s Statistics Net and it is also adjusted by the seasonally adjusted tool --X12.
And then do the indexation processing of 2005=100. On account of the lack of data of monthly data, I filled it through tracing
method.
Similarly, we choose the foreign industrial added value instead of the real income. In the 20 trading partners except for
Hongkong, Singapore, Thailand and Philippines, the datum of the others sample trading partners monthly industrial added
value all come from the OECD. They are all adjusted seasonally and based on 2205=100. Among them, the data which
referred to Australia in the OECD is monthly data. So in this article these datum are adjusted to the monthly datum according
to the tendency of time variation. However, the monthly industrial added value datum of the four countries or regions above
can only be transformed through the GDP released by IMF data bank into monthly datum and do the seasonal adjustment and
indexation treatment.
Just as mentioned above, the comprehensive index of industrial added value is the sum of each country or region’s
monthly industrial added value index multiplied by the trade-weight Wit. And we use it to replace the foreign real income Yft.
(3)Econometric Regression
Stationary Test
TABLE 1 : The stationarity test results of variable time series
Variate
Examination
form
(C,T,L)
ADF
Statistics
1%
critical
value
5%
critical
value
10%
critical
value
stationarity
lnTB (C,T,0) -4.499890 -4.115684 -3.485218 -3.170793 stationary
△lnTB (0,0,2) -7.330499 -2.605442 -1.946549 -1.613181 stationary
lnY (C,T,1) -1.381842 -4.118444 -3.486509 -3.171541 nonstationary
△lnY (C,0,0) -10.36003 -3.544063 -2.910860 -2.593090 stationary
lnYf (C,T,0) -5.815308 -4.115684 -3.485218 -3.170793 stationary
 △lnYf (0,0,0) -13.20453 -2.604073 -1.946348 -1.613293 stationary
lnREER (C,0,0) -1.584281 -3.542097 -2.910019 -2.592645 nonstationary
△lnREER (C,0,0) -7.959907 -3.544063 -2.91086 -2.59309 stationary
Note:△represents first order defference form; The C and T in the examination form represent the constant and time trend. L
represents the Lag Intervals for Endogenous, the selection of it is according to the rule of the AIC information criterion;
represents that the data is significant on the 1% significant level. represents that the data is significantly on the 5% significant
level.
We can see from TABLE1 that, Zhangzhou’s trade balance index TB, Zhangzhou’s real income index Y, foreign real
income index Yf and real effective exchange rate index REER are all transformed into stationary sequence after first order
BTAIJ, 10(20) 2014 Lin Wen 12005
difference. That to say, they are all first- order single sequence I (1). So we can do long-term cointegration integration
analysis on the four variables.
Cointegration Test
There are two methods to do the cointegration test. They are the Engle-Granger and the Johansen Cointegration Test.
What’s more, I establish the VAR (3) model to do the cointegration of lnTB、lnREER、lnY and lnYf. The result of it is shown
as Tan2 and TABLE 3.
TABLE 2 : The cointegration test results of Johansen
Valid subjects:lnTB lnY lnYf lnREER;Lag Intervals for Endogenous2
Null hypothesis (cointegration
vector)
Eigenvalues Trace statistic 5% critical value Probability
None* 0.522320 43.59002 27.58434 0.000200
At most 1 * 0.404491 30.58200 21.13162 0.001800
At most 2 0.062518 3.808878 14.26460 0.879000
At most 3 9.69E-07 5.72E-05 3.841466 0.996300
Note: * represents that it rejects the null hypothesis at the 5% significance level; The Johansen Cointegration Test is very sensitive
to the choice of Lag Intervals for Endogenous. Data in this article is chose according to the AIC information criterion.
TABLE 3 : The long-term cointegrating relationship estimate of real effective exchange rate and Zhangzhou’s trade
balance after standardization
lnTB lnY lnYf lnREER
1.000000 0.829567 -8.033245 -2.600736
(0.35431) (1.01209) (1.57838)
Note: The number in parentheses is the statistic t of estimated coefficients.
The result of cointegration test in TABLE 2 shows that Zhangzhou’s trade balance, RMB real effective exchange rate,
Zhangzhou’s real income and foreign real income exist two cointegration at the 5% significance level. It illustrates the
existence of long-term equilibrium relationship among each economic variables in Zhangzhou’s trade balance equation.
TABLE 3 is the standardized cointegration, it can be presented as the follow equation:
REERYYTB f ln600736.2ln033245.8ln829567.0-ln 
From the point of view of the elastic coefficient, the result of cointegration test shows that the real effective exchange
rate elasticity of Zhangzhou’s trade balance is 2.600736. It indicates that when the RMB real effective exchange rate
increased by 1% or RMB depreciated by 1%, Zhangzhou’s trade balance would increase 2.600736% which is the same as the
traditional theory that devaluation can expand trade exports. That’s to say the depreciation of RMB can expand the trade
exports of Zhangzhou. But on account of t is only 1.57838 which indicates that the long-term relationship between real
effective exchange rate and Zhangzhou’s trade balance is not significant and we can not adjust Zhangzhou’s trade balance
through exchange rate policy.
According to the Keynesian theory of international trade, there may be two kinds of circumstances between a country’s
income increase and its imports. The first is that with the increase of the country’s real income, the country’s real purchasing
power will also improve. So that the imports of this country will also increase. The other is that if the increase of the
country’s domestic income is the result of the increase of the output of domestic import substitution products, the country’s
imports would decrease. The result of cointegration test shows that Zhangzhou’s real income elasticity of trade balance is 0.829567 and its foreign real income elasticity is 8.033245. In other words, if Zhangzhou’s real income increased by 1%, its
trade balance would decrease by 0.829567. And if its foreign real income increase by 1%, its trade balance would increase by
8.033245%. The empirical results indicate that Zhangzhou is now in the first circumstance of Keynesian theory. Actually, the
result above matches the circumstance Zhangzhou’s trade export faced with now. With the development of Zhangzhou’s
economy, the increase of income improves the city’s real purchasing power so that it will improve the imports of trade
partners. Especially in 1998 and 1999, the deficit appeared in trade balance. So there is a negative relationship between
Zhangzhou’s real income and trade balance and a positive relationship between foreign real income and trade balance. To
make a conclusion, whatever Zhangzhou’s real income or foreign real income is not the main reason that influence its trade
balance in long term.
12006 Study of the impact of RMB real exchange rate on zhangzhou’s trade balance BTAIJ, 10(20) 2014
MAIN CONCLUSION
We can get the following conclusion through the long-term cointegration analysis on Zhangzhou’s trade balance and
RMB real effective exchange rate and other variables that:
There is a long-term cointegration relationship between Zhangzhou’s trade balance and RMB real effective exchange
rate and the influence of RMB real effective exchange rate on Zhangzhou’s trade balance is positive. That’s to say, the
depreciation of RMB can expand Zhangzhou’s trade that matches the traditional theory. However, since the statistic is not
significant, the RMB real exchange rate is not the main reason to influence its trade balance and the effect of the change in
exchange rate policy on Zhangzhou’s trade balance is very small.
There is a long-term equilibrium relationship between Zhangzhou’s trade balance and its real income. With the
development of Zhangzhou’s economy that its increase in income improve the actual purchasing power, Zhangzhou’s
imports from its trade partners increase. However, since the statistic is not significant, the effect on Zhangzhou’s exports is
very small.
There is a long-term stable relationship between Zhangzhou’s trade balance and foreign real income. There are so many
primary products in Zhangzhou’s export products. Foreign domestic industry’s demand for Zhangzhou’s primary products is
strong which improves the exports of Zhangzhou. So Zhangzhou’s trade balance has a positive influence on foreign real
income. Similarly, since the statistic is not significant, the effect on Zhangzhou’s exports is very small.
The empirical results shows that the slight appreciation of the RMB only has a little influence on Zhangzhou’s
economy. Although the relationship is no so significant, the slight depreciation would improve Zhangzhou’s exports.
ACKNOWLEDGEMENT
Funded by Fujian social science planning research project (2014B097) and the Project (GZM13013) supported by of
Fujian Branch of China Vocational Education Research Institute
REFERENCES
[1] Xie Jianguo, Chen Ligao; The RMB exchange rate and trade balance-cointegration research and shock
decomposition[J], World Economy, 9, 32-34 (2002).
[2] Lu Xiangqian, Dai Guoqiang; The influence of RER on China’s exports : 1994-2003[J], Economic Research, 5, 35-38
(2005).
[3] Lin Wen; The impact of the U.S dollar on America’s trade balance in the perspective of exchange rates pass[M],
Economic Science Press, 135-138 (2011).
[4] Lin Xiaowen, Huang Jie, Song Baoqing; An Empirical Analysis of RMB real effective exchange rate’s impact on
foreign trade-- taking Fujian Province as an example.[J], Fuzhou University Journal, 4, 37-39 (2010).
[5] Shen Guobin, Yang Yi; The relationship between the RMB real effective rate and China’s trade balance--1990-2004
monthly data analysis[J], Nanjing Party Administration Institute Journal, 5, 15-16 (2005).
[6] Song Zhaohan; The RMB real effective exchange rate and China’s trade balance[D], World Economic Situation, 5,
109-121 (2008).
[7] Liu Xinxin; Empirical Analysis on the relationship between the RMB real exchange rate and China’s international trade
balance[J], Shanghai Finance College Journal, 6, 142-143 (2005).
[8] Li Bohai; The relationship between the RMB real exchange rate and foreign trade balance--based on the analysis on
1973-2001 data[J], World Economic Research, 7, 62-66 (2003).
[9] A.K.Rose; Exchange Rates and the Trade Balance[J], Economics Letters, 35-39 (1990).
12001

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