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This paper builds a model of two types of Chinese exports, those processed and assembled laregely from imported inputs ("processed" exports) and "non- processed" exports. Based on this model, the sensitivity of Chinese exports to exchange rate changes is empirically examined. Unlike previous work, the estimation period includes the net real appreciation of the renminbi that has occurred over the past three years. The results show that greater exchange rate appreciation dampens export growth, both for non-processed and processed ex- ports, with the estimated cumulative price elasticity being substantially greater than unity. When the source of the increase in the Chinese real exchange rate is appreciations against the currencies of other emerging Asian trading partners, the eect on processing exports is positive but insign…cant, while the eect on non-processing exports is signi…cantly negative. By contrast, when the source of the increase in the Chinese real exchange rate is appreciation against China's advanced-economy trading partners, the eects on both types of exports are negative. These results are consistent with the predictions of the theoretical model. Counterfactual simulations based on the estimated model strongly sug- gest that if the trade-weighted real renminbi had appreciated at an annual rate of 10 percent per quarter since mid-2005, Chinese real exports would have been roughly 30 percent lower today. Thus greater exchange rate ‡exibility could contribute to lowering China's huge trade surplus through restraining growth of exports.

Are Chinese Exports Sensitive to Changes in the Exchange Rate?