Ahmed (2009) and Thorbecke and Smith (2010) examined the effects of exchange rates throughout the supply chain on China's processed exports. Their index measures how exchange rates affect the relative foreign exchange cost, not only of China's value-added manufacturing trade, but of China's entire output of processed exports. It is also desirable to examine how an appreciation throughout the supply chain would affect China's imports for processing.
In total, China's exports to 24 countries are used.2 The data is taken from China Customs Statistics. The framework in equation (1) is appropriate for China's mainstream exports, since most of the value added of these goods comes from Chinese factors of production (see Gaulier, Lemoine, and Unal-Kesenci, 2005). For processed exports, the bilateral exchange rate between China and the importing country measures how exchange rates affect the relative foreign currency cost of China's value added in the processing trade.
An integrated exchange rate across the supply chain would make it possible to measure how exchange rates affect the relative foreign exchange costs, not only of China's value added in processing trade, but of China's entire output of processed exports. To calculate an integrated exchange rate, China's value added in processed exports is calculated using the method of Tong and Zheng (2008). Each year, data from China Customs Statistics on the total value of processed exports and the total value of imports for processing are used to calculate China's value added.
The weights can then be used to find a weighted exchange rate (wrerj,t) for a country j that purchases China's processed exports by calculating the inner product of the weights and the bilateral real exchange rates between the countries supplying imports for processing and country j.: . ) 3.
Results for Export Elasticities
In both panels of Table 2, the first row reports elasticities for the integrated exchange rate. In both cases, the results show that an appreciation in the supply chain would lead to a large reduction in manufactured exports. The results thus show that China's manufactured exports are sensitive to rest-world GDP, although the magnitude of the estimated response varies by specification.
The third row reports coefficients on FDI and the fourth row coefficients on the time trend. So controlling for other factors, Chinese processed exports increased by an average of 20% per year or more over the 1994-2011 period. As in Table 2, an increase in FDI is associated with a large increase in exports when a time trend is not included.
However, when the trend is included, the FDI coefficients again get the wrong sign. As with processed exports, the time trend coefficient in Tables 3 and 4 show that China's conventional exports increased by an average of 20% per year or more during the period 1994–2011. Focusing on the estimates in Tables 2–4 obtained from their approach, the average income elasticity for processed exports is 1.32.
The PPML results therefore provide unbiased estimates and imply that rest of the world income exerts important effects on China's exports. These exchange rates are weighted averages of the bilateral exchange rates for the 24 countries used, with weights determined by the share of processed exports that go. However, the real effective exchange rate in supply chain countries depreciated by 10% over the same period.
As a result, the integrated real effective exchange rate has essentially the same value in 2012 as it did in 2002. However, the offset depreciation in supply chain countries implied that China's processed exports were not affected by the renminbi appreciation. An implication of the results presented here is that if countries in the supply chain.
How an Appreciation of the Integrated Exchange Rate Would Affect Processed Imports
As a result, the integrated real effective exchange rate has essentially the same value in 2012 as it did in 2002.. appreciation of China's REER reduced the growth of China's ordinary exports. An implication of the results presented here is that if countries in the supply chain .. allowed their exchange rates to appreciate in response to their large surpluses in processing trade and their global current account surpluses, China's processed exports would decline . The next section examines how such an appreciation would affect China's imports for processing. where imt represents the log of real imports for processing, ext represents the log of real processed exports, irert represents the log of the integrated exchange rate, and rgdp represents the log of Chinese real income.
Since processing imports are for the production of processed exports and not for the domestic market, China's GDP is not expected to have a large impact on processing imports. Data on processing imports to China over the period 1992-2012 from the same 24 countries listed in Note 2 are used. They are deflated using 1) the Hong Kong re-export value index per unit for exports to China, 2) the import price index for Chinese imports , obtained from the World Bank, and 3) the U.S.
Data on processed exports are obtained from China Customs Statistics, and data on China's real GDP are from the CEPII-CHELEM database. These results suggest that appreciation in the supply chain would increase imports for processing. The results show that China's processing imports are sensitive to China's processing exports, although the size of the estimated response varies by specification.
The third row reports the coefficients of China's GDP, and the fourth row reports the coefficients of the time trend. China's GDP is sometimes positive and sometimes negative, which as expected shows that there is no close relationship between processing imports and China's GDP. The coefficient on the time trend is positive and statistically significant in three out of six cases.
The implication of these results is that a common appreciation in East Asia will help rebalance China's processing trade. Since processed exports in 2012 and 2013 are almost twice as large as imports for processing, the key parameter for determining how the balance in processing trades. It is equal to -1 or less in each specification, implying that an appreciation of the integrated exchange rate will help rebalance processing trade.
Conclusion
This paper investigated in Section 5 how such an assessment would affect China's processing imports. Combining the effects on processed exports and processed imports, these results show that a coordinated assessment would help rebalance China's processing trade. One difficulty is that domestic policymakers and international organizations such as the IMF and the ASEAN+3 Macroeconomic Research Office (AMRO) conduct country-level surveillance.
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Vichyanond (2011), "Implications of Asia's Regional Supply Chains for Rebalancing Growth", Chapter 3, Regional Economic Outlook: Asia and the Pacific, April (Washington, DC: IMF). 2012), “Treatment of Trade, Exchange Rates and China's Bilateral Trade Balances, Global Imbalances and East Asian Monetary Cooperation”, in: D. Columns (1) and (2) report results with exports deflated using Hong Kong re-export unit values index for US exports Columns (3) and (4) report results with exports deflated using the export price index for Chinese exports obtained from the World Bank.
Columns (5) and (6) report results with exports deflated using the US producer price index for finished goods. Columns (1) and (2) report results with imports deflated using the Hong Kong re-export unit value index for exports to China. Columns (3) and (4) report results with imports deflated using an import price index for China's imports obtained from the World Bank.
Columns (5) and (6) report results with imports deflated based on the U.S. finished goods producer price index.
