Chinas Current Account and Exchange Rate

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Chinas Current Account and Exchange Rate

• Yin-Wong CHEUNG, UCSC HKU
• Menzie D. CHINN, UW-Madison NBER
• Eiji FUJII, University of Tsukuba

NBER Conference Chinas Growing Role in World
Trade August 3, 2007
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Chinas Current Account
Source IMF, World Economic Outlook April 2007
database
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The Value of CNY
Source IMF, International Financial Statistics,
authors calculations
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Trade Balance and Forex Reserves
Source IMF, International Financial Statistics
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Outline

• An analysis of the CNY misalignment issue using
  the standard deviations-from-Absolute PPP
  approach
• Highlighting the tension between economic and
  statistical significance
• Closer look at elasticities from a macro
  perspective
• The importance of uncertainty arises again
• Exchange rate is important but not central

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Evaluating the Exchange Rate
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Exploiting the Penn Effect

• Data from World Development Indicators, 1971-2005
• Vintages of WDI matter (the China path is
  substantially different than our previous paper)
• The r is in PPP terms, the y in USD, PPP terms

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The Penn Effect Estimated
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The Penn Effect Illustrated (I)
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The Penn Effect Illustrated (II)
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Observations

• The 2005 CNY is about 1.5 standard errors from
  conditional mean, so statistically not misaligned
• But the point estimate indicates a 50 (!)
  undervaluation (in log terms)
• If one changes the definition of undervaluation
  as (e.g.) 3 consecutive years of misalignment,
  not much changes since ? 0.95

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Investigating Chinas Trade Elasticities
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Multilateral Trade Elasticities

• Standard static imperfect substitutes approach.
• Analysis conducted on quarterly frequency, over
  1993-06 period.
• Sample period largely dictated by data
  availability (changes in data collection).
• y, y are real GDP, q is CPI deflated, z is
  supply variable, w additional demand factor

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Chinese Exports
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Two (Recurring) Problems

• Chinese export data dont match rest-of-world
  import data, vice versa
• No Chinese deflators, pre-2005
• We rely on the Chinese data for multilateral
  exports, imports
• We try various proxies as deflators

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Proxies for Export Deflators
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Observations

• Holding z constant results in really high income
  elasticity estimates, wrong sign on exchange
  rate.
• For aggregate exports, only z matters.
• For ordinary exports, income is insignificant,
  while others come in significantly
• Processing and parts exports fit quite well
• All results sensitive to inclusion of trend

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Chinese Imports
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Proxies for Import Deflators
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Some Observations

• Aggregate, ordinary imports have wrong signed
  price elasticities
• Processing and parts imports only slightly better
  behaved

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Alternative Import Specification

• Since others have suggested a link between parts
  imports and exports, we include total exports, w
• This yields more intuitive estimates for the
  exchange rate elasticity

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Implications for Policy (I)

• Multilateral basis, 10 appreciation leads to
• A decline of imports by 70 bn
• A rise in the TB of 15 bn
• Zeroing out the perverse elasticity leads to a
  decline in the TB of 46 bn
• 2006 TB was 956 bn (2000)
• ( lt 86 bn in Marquez-Schindler)
• A decline of exports by 25 bn (2000)

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Bilateral Trade Elasticities

• The standard equation augmented with a trade
  weighted ex-U.S. real exchange rate variable
• The q is now CNY/USD (CPI deflated)
• We examine both Chinese and US measures of
  China-US trade

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Chinese Exports to U.S.
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What Accounts for the Differences?

• For Chinese exports, Chinese record as f.o.b., US
  reports as c.i.f.
• Chinese goods transiting HK might or might not be
  correctly attributed to China
• Value added in HK might be improperly attributed
  to China
• (see e.g., Schindler and Beckett, 2006)

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Proxies for Chinese-U.S. Export Deflators
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CNY/USD Real Exchange Rate
Note Adjusted indicates nominal exchange rate
takes into account transactions taking place at
floating rate.
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Chinese Bilateral Export Elasticities
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Chinese Imports from U.S.
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Proxies for Chinese-U.S. Import Deflators
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Chinese Bilateral Import Elasticities
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Implications for Policy (II)

• A 10 real appreciation of CNY/USD results in
• 33 bn (2000) reduction in trade balance
• The 2006 China-US trade balance was 229 bn (2000)
• No necessary implication for overall US trade
  deficit

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Next Tasks

• Formal calculation of misalignment probabilities
• Checking for sensitivity to additional regressors
• Alternative measures of rest-of-world GDP (export
  weighted GDP, world imports)