An Analysis of the Influence of the Real Exchange Rate of RMB on the Chinese Foreign Trade Dependence Ratio

By Sun, Qiang | International Management Review, January 1, 2008 | Go to article overview

An Analysis of the Influence of the Real Exchange Rate of RMB on the Chinese Foreign Trade Dependence Ratio


Sun, Qiang, International Management Review


[Abstract]

The author analyzes previous studies on the Chinese foreign trade dependence ratio first, and then makes the point that the real exchange rate of RMB is the important factor that influences its changes. This paper studies the relations between the real exchange rate and foreign trade dependence by theoretical and empirical analysis, but an opposite phenomenon is found between them. So, the author discusses the trend of Chinese foreign trade dependence research.

[Keywords] Chinese foreign trade dependence ratio; real exchange rate of RMB; empirical analysis

Introduction

Chinese foreign trade underwent a rapid and sustainable growth after reform and opening. From 1978 to 2004 the growth rate stayed at 16.7%; then in 2004, the volume exceeded one trillion dollars, 56 times the volume in as 1978. It reached 3rd from 26th on the world trade order. It is said that China may be the largest international trade country in the world in 2015. The foreign trade dependence, which is the general index used to measure foreign trade in the world, changes with the development of Chinese foreign trade and shows the features of development by stages. The first stage covers 12 years from 1978 to 1989 when the ratio of the index grew steadily from 9.8% to 24.6%. The second stage covers 10 years from 1990 to 1999, and the ratio in this stage fluctuated greatly, reaching 37.1%, but still stayed within the norms when compared with other countries. The third stage is from 2000, and the ratio of foreign trade dependence ascends rapidly, growing from 40% to 80%.

Simon Kuznet concluded that one country's foreign trade dependence generally has a negative correlation with its economics scale after his study based on the data from middle 19th century to 1970s. Some Chinese surveys indicate that some developed countries', such as Japan, America, and Germany, foreign trade dependence ratio remains steadily in the 14% to 20% range, much as India does. This has created public interest in discussing the Chinese foreign trade dependence ratio's meaning in terms of national economic safety, especially since China has entered the WTO and reached a new foreign trade peak every year; consequently, the ratio reaches its summit with the development of foreign trade, frequently causing trade friction. As a result of this situation, Chinese researchers have made great efforts to study foreign trade dependence.

The Summary of Chinese Foreign Trade Dependence Research and Problems

There has been a major change in Chinese foreign trade dependence from 1990s through the 20 century. After China's entry into the WTO, Chinese trade has been increasing more and more. The Chinese foreign trade dependence ratio and subsequent foreign trade frictions have reached a new peak, causing Chinese experts to pay more attention to the studies of the Chinese foreign trade ratio. Among them, Professor Huang Weiping from the Renmin University of China, Dr. Mei Xinyu from the Ministry of Commerce of The People's Republic of China, and Professor Zhang Yuyan from the Chinese Academy of Social Sciences believe that, the Chinese foreign trade ratio is more than 80%, which is too high to maintain the development and security of China's economy. However, others have different opinions, such as Long Guoqiang from the Development Research Center of the State Council, Long Yongtu from Standard & Poors think that the real ratio is not reaching that high and there are a lot of factors that make ratio inaccurate, such as the structure of industry, index of statistics, and the level of development and exchange rate of RMB. So, we do not need to worry about it.

The debate on the Chinese foreign trade ratio does not only focus on the high or low of ratio. Zhang Hanlin from China National Institute of the WTO makes another point: the concept of foreign trade ratio is inaccurate and not scientific. Guo Xudan, from Shanghai University of Finance and Economics, made a good analysis on the ratio's concept; Shen Lisheng (2005) from the Chinese Academy of Social Sciences, worked out a new formula to calculate the Chinese foreign trade ratio based on input-output tables. …

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