ADBI Working Paper Series

How Would an Apprec iation of the
Y uan Affec t the P eople’s R epublic of C hina’s S urplus in P roc es s ing
T rade?

Willem Thorbecke

No. 219
June 2010

Asian Development Bank Institute

Willem Thorbecke is a senior research fellow at ADBI. He thanks Ginalyn Komoto for excellent research assistance.
The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of ADBI, the Asian Development Bank (ADB), its Board of
Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.

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Suggested citation:
Thorbecke, W. 2010. How Would an Appreciation of the Yuan Affect the People’s Republic of China’s Surplus in Processing Trade? ADBI Working Paper 219. Tokyo: Asian
Development Bank Institute. Available: http://www.adbi.org/workingpaper/2010/06/18/3913.yuan.affect..prc.surplus.trade/

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ADBI Working Paper 219

Thorbecke

Abstract
Enormous trade surpluses are problematic for the People’s Republic of China (PRC) and the rest of the world. They primarily stem from processing trade. This paper investigates how exchange rate changes would affect the PRC’s imports for processing and processed exports. The results indicate that an appreciation throughout East Asian supply chain countries would reduce the PRC’s surplus in processing trade, while an appreciation of the yuan alone might not. Even for an appreciation throughout East Asia, however, the sum of the exchange rate elasticities is not large. Thus, to rebalance the PRC’s trade, exchange rate appreciations must be accompanied by other changes such as factor market liberalization and greater enforcement of environmental regulations.
JEL Classification: F32, F41

1

ADBI Working Paper 219

Thorbecke

Contents
1.

Introduction ................................................................................................................ 1

2.

PRC’s Processing Trade............................................................................................ 2

3.

Data and Methodology............................................................................................... 6
3.1
3.2
3.3

Specifying Export and Import Functions ............................................................ 6
Constructing an Integrated Exchange Rate....................................................... 7
The Econometric Model .................................................................................... 8

4.

Results .................................................................................................................... 10

5.

Discussion ............................................................................................................... 13

6.

Conclusion ............................................................................................................... 15

References ......................................................................................................................... 16
Appendix: Data ................................................................................................................... 18