By
estimating trade balance equation, export equation and import equation, this
paper shows empirically that China’s trade surplus is not sensitive to the
fluctuations in the real effective exchange rate, but the price elasticity has
become large and significant in the period from 2005 onwards after the new
exchange rate regime was instituted on 21 July, 2005. In the latter case, I
found divergent results on ordinary trade and processing trade, i.e. the appreciation in Renminbi has
found to reduce ordinary trade balance and increase processing trade balance.
In addition, I found the appreciation has larger impact on processing trade
(both the processing exports and the processing imports) than it has on
ordinary trade.
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