《外文文献人民币升值对美国经济（定稿）》

JournaloftheAsiaPacificEconomy

Volume17,Issue1,2012

WillRMBappreciationreducetradedeficitintheUS?

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10.1080/13547860.2012.640021

JamesXiaoheZhangapages171-187

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Abstract

AlthoughtheRenminbi(RMB)appreciatedbymorethan25%againsttheUSdollarinnominaltermsbetween2005and2011,China,sexportscontinuedtogrow,leadingtoasurplus,representingapproximatelyfor10%ofitsGDP.ThispaperassessesthemajorexplanationsforthesurgeofChina*sexportsandtradesurplusandtacklestheissueofwhetheranappreciationoftheRMBwouldhelptheUStoreduceitstradedeficits.Afterconductingsimulationexercisesonthemulti-countrymacro-econometricFairmodel,thispaperofferssomenewexplanationsfortheunexpectedsurgeinChina，stradesurplus,namelyalowoverallpriceelasticityandahighdomesticincomeelasticityforthetradablegoodsinbothcountries,andaconsequentialsluggishpricepass-throughprocessoftheRMBappreciationontheUSmarket.ItthusquestionstheeffectivenessofRMBappreciationasaninstrumenttorestorethetradebalancebetweenChinaandtheUS.

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China,

RMB,

exchangerate,

revaluation,

appreciation

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053

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Abstract

Jumptosection

1.Introduction

2. Tradeimbalanceissues and thevalueof.,・

3. Policyrecommendations to...

4. Aquantitativeassessment

5. Conclusion

AlthoughtheRenminbi(RMB)appreciatedbymorethan25%againsttheUSdollarinnominaltermsbetween2005and2011,China，sexportscontinuedtogrow,leadingtoasurplus,representingapproximatelyfor10%ofitsGDP.ThispaperassessesthemajorexplanationsforthesurgeofChina'sexportsandtradesurplusandtacklestheissueofwhetheranappreciationoftheRMBwouldhelptheUStoreduceitstradedeficits.Afterconductingsimulationexercisesonthemulti-countrymacro-econometricFairmodel,thispaperofferssomenewexplanationsfortheunexpectedsurgeinChina'stradesurplus,namelyalowoverallpriceelasticityandahighdomesticincomeelasticityforthetradablegoodsinbothcountries,andaconsequentialsluggishpricepass-throughprocessoftheRMBappreciationontheUSmarket.ItthusquestionstheeffectivenessofRMBappreciationasaninstrumenttorestorethetradebalancebetweenChinaandtheUS.

Keywords

•China,

RMB,

exchangerate,

revaluation,

appreciation

JELclassifications

019,

024,

053

Introduction

Jump to section

1. Introduction

2.Tradeimbalanceissuesandthevalueof...

3. Policyrecommendations to...

4. Aquantitative assessment

5. Conclusion

Asthesecondlargesteconomyandthelargestexporterintheworld,China'stotalexportsofgoodsandservicesquadrupledfrom$326billionin2002to$1430billionin2008,andtoover$1578billionin2010(NBSC2011).ThissurgeinChina'sexportswasaccompaniedbyanappreciationoftheRenminbi(RMB),theChinesecurrency,ofmorethan25%againsttheUSdollarinnominaltermsbetween2005and2011.WhentheRMBbroke7yuanperUSdollarforthefirsttimein13years,China'scurrentaccountsurplushitahistoricalrecordofUS$298billionin2008,accountingforabout7%ofitsGDPinrealterms.ThissurgehasnotbeendisruptedbytheacceleratedappreciationoftheRMBin2010,withexportsincreasingby31.3%duringtheyear.Asaresultofrapidgrowthinexportsandthetradesurplus,China'sforeignexchangereserveshitahistorichighof$3.04trillionbytheendofMarch2011,representinganincreaseof24.4%yearonyear.ThisfigurewasalmosttripletheforeignexchangereservesofJapan,thesecondlargestholderofforeignexchangereservesintheworld.

Bycontract,tradedeficitsintheUShaveincreasedsignificantlyoverthelastdecade,raisingfromUS$265billionin1999toapeakvalueofUS$759billionin2006andUS$712billionin2007,accountingfor9%and11%ofGDP,respectively(GoldsteinandLardy200822.Goldstein,M.andLardy,N.2008.DebatingChina"sexchangeratepolicy,Washington,DC:PetersonInstituteforInternationalEconomics.

Viewallreferences,p.17).Sincethetradegapbetweenthetwolargesteconomiesintheworldgrewovertime,many,ifnotmost,commentatorshaveattributedtheimbalancetotheundervaluationoftheChinesecurrencyandthuscallforasignificantrevaluationoftheRMB.Againstthisbackdrop,theUSCongresshasattemptedtotakesomeprotectiveactionsagainstChina.AlthoughthetwobillsofSchumer-Grahamin2005andGrassley-Baucusin2006werebothaborted,PresidentBarackObamafinallyimposedtariffsstartingat35%on$1.8billionoftireimportsfromChinainSeptember2009.TherecentdevelopmentsintheUSmaybeconsideredassendingwarningsignalsthatChinaandtheUScouldbemarchingtowardsatradewarifthetradedisputesbetweenthetwolargetradingcountriescannotbehandledproperly.

Theseeventshavealsoattractedmajoracademicinterestofhowasignificanttradeimbalancebetweenthetwocountriescouldbecreated,andwhatpolicyinitiativesareneededtoreducethetradeimbalance.Specifically,whydidtheRMBappreciationfailtoreducethetradeimbalancebetweenChinaandtheUS?Thispaperattemptstoanswerthisimportantquestion.

ThispaperfirstreviewssomeexplanationsofthegrowthofChineseexportsanditstradesurplusinthe2000singeneral,andonthetradeimbalancebetweenChinaandtheUSinparticular.Second,thepapercontributestotheexistingliteraturebysheddingnewlightontheissueofSino-UStrade,byrunningseveralsimulationsofthemulti-country(MC)macro-econometricFairmodel.Specifically,itisfoundthatthepriceelasticityislowbutincomeelasticityishighforbothcountries.Asaresult,thepricepass-throughprocessissluggishwhentheRMBisappreciated,andtradeimbalanceincreases.InsteadofcallingforanevenlargerrevaluationoftheRMB,assomecommentatorshavesuggested,thispaperquestionstheeffectivenessofusingRMBrevaluationasaninstrumenttorestorethetradebalancebetweenChinaandtheUS.Itissuggestedthatcooperationandcoordination,ratherthanrestrictionsandretaliationontrade,areneededtoaddresstheinter-countryconflictsconcerningtradeimbalances.

Therestofthepaperisorganizedasfollows.ThenextsectionassessesbrieflytheexchangerateexplanationsofthetradeimbalancebetweenChinaandtheUS.Section3summarizesthepolicyrecommendationofferedbysomecommentators.ThesimulationresultsarebrieflyreportedandanalysedinSection4.Thefinalsectionconcludes.

TradeimbalanceissuesandthevalueofRMB

Jump to section

1. Introduction

2.Tradeimbalanceissuesandthevalueof...

3. Policyrecommendations to...

4. Aquantitative assessment

5. Conclusion

ItiswellknownthatthesurgeinChina'stradesurplushasbeenassociatedwithrisingtradedeficitsintheUSinthe2000s.Whenthe

UStradedeficitreached6.2%ofGDPin2006,China，stradesurplusincreasedto11%ofGDPin2007(GoldsteinandLardy200822.Goldstein,M.andLardy,N.2008.DebatingChina"sexchangeratepolicy,Washington,DC:PetersonInstituteforInternationalEconomics.

Viewallreferences,p.17).AlthoughChina'stradesurplusfellsharplyandtheUSglobaltradedeficitdeciinedin2009and2010aftertheadventoftheglobalfinancialcrisis,thebilateraltradebalancebetweenthetwocountriesactuallyworsened.Table1providessomebilateraltradedatawhichshowthatthetradeimbalancebetweenthetwocountrieswasrisingafter2005whentheRMBstartedtoappreciate._

TherearesignificantdivergencesintradestatisticsreportedbyChinaandtheUS.Withoutneglectingthesignificanceinthesedivergencesandtheirimpacts,thispaperusesmainlytheUSdatasourceunlessitisspecified.Viewallnotes

TablelshowsclearlythattheUSimportsfromChinaoverwhelminglyexceedsitsexportstoChinadespitebothexportsandimportsgrowingatdoubledigitratesuntil2008.ThesurgingChineseexportsintheUSmarketmakesChinathelargestcontributortotheUSrisingtradedeficit,withitsshareontheoverallUStradedeficitincreasingfrom22%in2000to31%in2006,38%in2008,59%in2009and55%in2010.Basedonthisobservation,manycommentatorsblametheenlargedtradeimbalancebetweenthetwocountriesontheundervaluedRMB,thoughtherearesomeotherfactorsthatarealsoconsideredtobeimportantinthedeterminationofthebilateraltradeimbalance.」

Otherfactorsmayincludeanastonishinghighsavingrateoverdomesticinvestment(seeforinstance,Corden2007,2009,McKinnon2007andAnderson2008),demographicchange(Ito2009)andsomeinstitutionaltradebarriersinChina(Woo2008,Xiao2008).ViewallnotesAccordingtosomerecenteconometricstudiesontheequilibriumexchangerate,theRMBwasundervaluedbyanorderof15-35%before2005(GoldsteinandLardy200320.Goldstein,M.andLardy,N.2003.TwostagecurrencyreformforChina.Asianwallstreetjournal,September12

Viewallreferences,200621.Goldstein,M.andLardy,N.2006.China'sexchangeratedilemma.Americaneconomicreview,96(2):422-426.[CrossRef]

Viewallreferences,ChangandShao20048.Chang,G.H.andShao,Q.2004.HowmuchistheChinesecurrencyundervalued?Aquantitativeestimation.Chinaeconomicreview,15(3):366-371.

[CrossRef],[WebofScience®]

Viewallreferences,F.ZhangandPan2004,Frankel200618.Frankel,J.2006.OntheYuan:thechoicebetweenadjustmentunderafixedexchangerateandadjustmentunderaflexiblerate.CESifoeconomicstudies,52(2):246-275.

[CrossRef],[WebofScience®]

Viewallreferences,Goldstein200719.Goldstein,M.2007.uAssessingprogressonChina'sexchangeratepolicies.TestimonytotheHearingonRisksandReform:theroleofcurrencyintheUS-Chinarelationship,CommitteeonFinance,USSenate,28March”.Washington,DC

Viewallreferences),andisstillabout30-40%aboveitslong-runequilibriumexchangerate,muchlargerthanitwasin2005(EverardandChong200715.Everard,B.andChong,T.T.-L.2007.TherevaluationandfutureadjustmentoftheRenminbi.TheChineseeconomy,40(5):6-20.[CrossRef]

Viewallreferences,Benassy-Quereetal.20085.Benassy-Quere,A.,Lahrdche-R6vil,A.andMignon,V.2008.IsAsiaresponsibleforexchangeratemisalignmentwithintheG20?.Pacificeconomicreview,13(1):46-51.[CrossRef],[WebofScience®]

Viewallreferences,GoldsteinandLardy200822.Goldstein,M.andLardy,N.2008.DebatingChina"sexchangeratepolicy,Washington,DC:PetersonInstituteforInternationalEconomics.

Viewallreferences,pp.51-55,2009,p.26).

DespitemostcommentatorsbelievingthattheRMBisstillundervalued,theestimationonthedegreeofundervaluationdiffersfromonetoanother.Amongthe18studiessurveyedbyClineandWi11iamson(2008,p.133),thegapinestimationbetweentherealeffectiveequilibriumexchangerateandactualnominalratevariesfromanundervaluationof56%(Frankel200618.Frankel,J.2006.OntheYuan:thechoicebetweenadjustmentunderafixedexchangerateandadjustmentunderaflexiblerate.CESifoeconomicstudies,52(2):246-275.[CrossRef],[WebofScience®]

Viewallreferences)toanovervaluationof5%(Wang200445.Wang,T.2004.

aExchangeratedynamics”.InChina"sgrowthandintegrationintotheworldeconomy:prospectsandchallenges,(IMFOccasionalPaper232)

Editedby:Prasad,E.21-28.Washington,DC:IMF.

Viewallreferences).Moreover,Dunawayetal.(200914,Dunaway,S.,Leich,L.andLi,X.2009.Howrobustareestimatesofequilibriumrealeffectiveexchangerate:thecaseofChina.Pacificeconomicreview,14(1):361-375.[CrossRef]

Viewal1references)questionsthereliabilityofal1theseestimationsinreferencetotheirfailurestopassasensitivitytest,i.e.,asmallchangeinmodelspecification,variabledefinitionandtimeperiodusedintheestimationswouldleadtoverysubstantialdifferencesinthereportedequilibriumexchangerate.

Sincetheequilibriumexchangerateisunobservable,thispaperusesarealbilateralexchangeratetolinktheRMBwithtradeimbalancebetweenChinaandtheUS.FollowingKrugmanandObstfeld(2009,p.401),therealexchangerateisdefinedasthepriceoftheforeignbasketofgoodsintermsofthedomesticbasketofcomparablegoods.TheestimatedchangeintheRMBrateagainsttheUSdollarisplottedinFigure1.Thecurvesstartfrom1993,oneyearbeforethenominalRMBwasdevaluedbymorethan30%,totheendof2008,whenthenominalRMBappreciatedby20%.ThechangeinRMBratesisalsocomparedwithChina，scurrentaccountoverthesameperiodandexporttotheUSandtradebalanceinChinainthe2000sinthebottomofthefigure.

Figure1ChangesinRMBrateandtradebalance.Source:ThefigureisplottedonthebasisofofficialdataobtainedfromNBSC(2011)andUSCensusBureau(2009).

Viewlarger

PheGDPdeflatorsusedinthecalculationarecollectedversion(35K

fromtheUnitedNations(2009).Note:Al1pricedataare1

convertedinawaythatmakes1994thebaseyear.WhiletheexchangerateisshownasthetotalamountofRMBper100USdollarontheleftaxis,thetradebalanceisshowninUS$inbillionsontherightaxis.ThepricelevelsofthetwocountriesareapproximatedbytheirGDPdeflatorpublishedbytheUNandtheWorldBank.WhentheGDPdeflatorisreplacedbyotherpriceindices,suchastheconsumerpriceindex(CPI),themagnitudeofthedivergencediffersslightly,butthetrendremainssimilar.

Figure1showsasubstantialgapbetweenthenominalandtherealRMBexchangerate.Duringtheearlyperiodbetween1993and1997whenChinaexperiencedhighinflation,therealRMBappreciatedbyabout14%ascomparedwitha2%nominalappreciationoverthesameperiod.However,therealRMBdepreciatedslightlythereafterduringtheAsianfinancialcrisisforfiveyearsuntil2003whenitstartedtoappreciateagain.AfterJuly2005,whenthenominalRMBratewasrevaluedby2.1%overnightforthefirsttimein12years,therealRMBappreciationacceleratedandexceededthenominalappreciation,sothegapbetweenthetworatesenlarged.

Figure1alsorevealsthattheincreaseinChina'snetexportstotheUSwasmodestandthattherewasnosignificantcorrelationbetweenexportgrowthandtherealexchangeratebetweenthelate1990sandtheearly2000s.However,after2004,whenboththerealandthenominalRMBrateappreciatedsignificantly,China'stradesurplussurged,driveninpartbyitsgrowingtradesurpluswiththeUS.Thisenigmaticphenomenonwarrantsexplanations.Particularly,whydidthetradesurplussurgeonlyafter2004andcontinuetosurgeaftertheRMBstartedtoappreciatein2005?

Anumberofstudiesthusturntoseekthereasonsbehindthispuzzle,andsomehaveattributedittosomespecialcharacteristicsthatdifferentiateChinafromtherestoftheworld.Inparticular,theChineseexportingfirmsappeartobeabletoabsorbtheimpactoftheRMBappreciation.AccordingtotheUSDepartmentofLabour,BureauofLabourStatistics,whentheRMBappreciatedby18%againsttheUSdollarbetweenJune2005andMarch2008,thepriceofChinesegoodsexportedtotheUSrosebyonly2.5%(GoldsteinandLardy200923.Goldstein,M.andLardy,N.2009.ThefutureofChina'sexchangeratepolicy,Washington,DC:PetersonInstituteforInternationalEconomics.

Viewallreferences,p.61).Thus,therearesomefactorsthathavehinderedthepricepass-throughoftheRMBappreciation.GoldsteinandLardy(2009,p.61)attributethistorapidproductivitygrowthinChineseexportingfirmsoverthisperiod.Theythusspeculatethattheexportsurgeafter2004wascreatedbyanincreasedabilityoftheChineseexportingfirmstoabsorbtheadverseeffectofRMBappreciation,whenthegrowthofproductivityinChineseexportsexceededthepaceofnominalappreciation.

AnotherfactorthatmayalsodampentheeffectofanappreciationisthelargeimportcontentofChineseexports,whichisbelievedtobeintherangeof30-35%oftheexportvalue(GoldsteinandLardy200822.

Goldstein,M.andLardy,N.2008.DebatingChinafsexchangeratepolicy^Washington,DC:PetersonInstituteforInternationalEconomics.

Viewallreferences,p.21).Itssharehasalsorisenovertime.ItisestimatedthatabouthalfofChinesetotalexportswereprocessingactivitieswheretheimportcontentwasashighas55%in2007(Dunawayetal.200914.Dunaway,S.,Leich,L.andLi,X.2009.Howrobustareestimatesofequilibriumrealeffectiveexchangerate:thecaseofChina.Pacificeconomicreview,14(1):361-375.[CrossRef]

Viewallreferences,p.364,Maefal.2009).Anotherestimation(Koopmanetal.200826.Koopman,R.,Wang,Z.andWei,S.-J.2008.HowmuchofChineseexportsisreallymadeinChina?Assessingdomesticvalue-addedwhenprocessingtradeispervasive9(NBERWorkingPaper14109)Cambridge,MA:NationalBureauofEconomicResearch(NBER).[CrossRef]

Viewallreferences)indicatesthatonly20%oftheprocessedexportvalueisproducedinChina,whiletheremaining80%isimported.ThustheaverageimportcontentofChina'sexportscouldbeashighas44%inthemid-2000s.Inthepresenceofsignificantimportcontent,anRMBappreciationwouldleadtoasmallerexportpriceincreasethanwhenexportshadnoimportcontent.Forthisreason,Bagna(20094.Bagna,A.2009.TheroleofChinainglobalexternalimbalances:somefurtherevidence.Chinaeconomicreview,20(3):508-526.

[CrossRef]

Viewallreferences)arguesthatanysuccessfulattemptatdampeningChineseexportswouldalsodampenChineseimports,therebyoffsettingtosomeextenttheimpactontheChinesetradebalance.KierzkowskiandChen(201025.Kierzkowski,H.andChen,L.2010.Outsourcingandtradeimbalances:theUnitedStates-Chinacase.Pacificeconomicreview,15(1):56-70.[CrossRef],[WebofScience®]

Viewallreferences)estimatethatapproximatelytwo-thirdoftheUStradedeficitswouldhavedisappearedin2003iftheimportsofpartsandcomponentsbybothcountrieswereomitted.Intermsofvalue-added,theUS-China'true'tradedeficitswouldthenbeaboutUS$30.2billion,approximatelyhalfofwhatwasreported.

Chineseimportsdemandisalsodistinctive.AsnotedbyOgawaandIwatsubo(200937.Ogawa,E.andIwatsubo,K.2009.ExternaladjustmentsandcoordinatedexchangeratepolicyinAsia.JournalofAsianeconomics,20(3):225-239.[CrossRef]

Viewallreferences)intheiranalysisofthecausesfortradesurplus,

ChinaistheonlycountryinEastAsiainwhichdomesticaggregatedemanddeterminesitscurrentaccount,whereastheexchangeratehasnosignificantimpact.Woo(200846.Woo,W.T.2008.UnderstandingthesourcesoffrictioninU.S.-Chinatraderelations:theexchangeratedebatedivertsattentionawayfromoptimumadjustment.Asianeconomicpapers,7(3):65-99.[CrossRef],[WebofScience®]

Viewallreferences)andXiao(200847.Xiao,G.2008.China'sexchangerateandmonetarypolicies:structuralandinstitutionalconstraintsandreformoptions.Asianeconomicpapers,7(3):31-49.[CrossRef],[WebofScience®]

Viewallreferences)attributethesluggishgrowthinimports,comparingwiththesurgeinexports,tosomeinstitutionalfactors,includingChina'sweakfinancialsystem,lackingofconsumerfinancing,incompletesocialsecuritysystemandaconsequentialhighsavingrate.

TheatypicalresponseofChineseexportsandimportstoanRMBappreciationleadstoaconjecturethatasimplenominalappreciationofitscurrencymaynotwork.Witharesilientexportsectorandasluggishimportdemand,thepricepass-throughprocessfollowinganRMBappreciationcouldbeminimal.Thishypothesis,knownasthe

4Mundell-Stiglitz-McKinnonconjecture,,istestedinSection4.

Acloselyrelatedapproachreferstothe4overallelasticity*argument,i.e.,whethertheRMBappreciationisstrongenoughtoimpactthetradebalancethroughpricechangesinforeignmarketdependsonanoverallpriceelasticityofexportsandimports.Accordingtothisapproach,theRMBappreciationwouldbeeffectiveinreducingChina，stradesurplusonlyifthenotableMarshall-Lernerconditionisheldforthecountry*stradablegoods._

3.Accordingtoconventionaltextbookversionofinternationaleconomics,theMarshall-Lernerconditionstatesthatifthesumofexportelasticityandimportelasticityisgreaterthan1,thecurrentaccountsurpluswilldeclineasaresultofcurrencyappreciation(SeeCarbaugh2011,p.448).Viewallnotes

AlthoughtherearesomeeconometricstudiesshowingthatChina*sexternaltradeisprice-elasticsothattheMarshall-Lernerconditionholds(see,forinstance,Kwacketal.200728.Kwack,S.Y.,Ahn,C.Y.,Lee,Y.S.andYang,D.Y.2007.ConsistentestimateofworldtradeelasticitiesandanapplicationtotheeffectsofChineseYuan(RB)appreciation.JournalofAsianeconomics,18(2):314-330.[CrossRef]

Viewallreferences,AzizandLi20082.Aziz,J.andLi,X.2008.China,schangingtradeelasticities.China&worldeconomy,16(3):1-21.[CrossRef]

Viewallreferences,Baak20083.Baak,S.2008.ThebilateralrealexchangeratesandtradebetweenChinaandtheU.S.Chinaeconomicreview,

19(2):117-127.

[CrossRef]

Viewallreferences,ShuandSu200938.Shu,C.andSu,X.2009.Exchangeratepass-throughinChina.China&worldeconomy,17(1):33-46.[CrossRef]

Viewal1references,ThorbeckeandSmith200940.Thorbecke,W.andSmith,G.2009.HowwouldanappreciationoftheRenminbiandotherEastAsiancurrenciesaffectChina，sexports.Reviewofinternationaleconomics,18(1):95-108.[CrossRef]

Viewallreferences,andYu200948.Yu,M.2009.RevaluationoftheChineseYuanandTriadTrade:agravityassessment.JournalofAsianeconomics,20(6):655-668.[CrossRef]

Viewallreferences),otherstudiesyieldcontraryfindings.Forinstance,usingadynamicpanelspecificationanddisaggregatedtradeflows,MannandPltlck(200730.Mann,C.L.andPlUck,K.2007.uUnderstandingtheU.S.tradedeficit:adisaggregatedperspective”.InG7currentaccountimbalances:sustainabilityandadjustment,Editedby:Clarida,R.H.Chicago,IL:UniversityofChicagoPress.Availablefrom:/chapters/c0129.pdf[Accessed12July2011]

Viewal1references)reportthatthepriceelasticitiesforUSimportsfromChinaarewrong-signedandthatpriceelasticitiesforUSexportstoChinaarenotstatisticallysignificant.Usingdynamicordinaryleastsquares(OLS)methods,Cheungetal.(20109.Cheung,I.-W.,Chinn,M.D.andFujii,E.2010.“China'scurrentaccountandexchangerate”.InChinarsgrowingroleinworldtrade,Editedby:Feenstra,R.C.andWei,S.-J.231-280.Chicago,IL:UniversityofChicagoPress.

Viewallreferences)findthatanappreciationoftheRMBincreasesUSexportstoChinabutdoesnotaffectChina'sexportstotheUS.CoudertandCouharde(200713.Coudert,V.andCouharde,C.2007.RealequilibriumexchangerateinChina:istheRenminbiundervalued?.JournalofAsianeconomics,18(4):568-594.

[CrossRef]

Viewallreferences)maintainthatdespitethattheRMBbeingundervaluedineffectiveterms,arevaluationoftheRMBwouldhaveonlyasmalleffectontheUSexternaldeficit.

AnotherexplanationofthelimitedimpactoftheRMBappreciationontradebalancereferstothe'J-curve'effect.TheimplicationisthatChina'stradesurplusshouldincreaseimmediatelyaftertheRMBappreciationfollowinganinstantimprovementinitstermsoftrade.However,undertheMarshall-Lernercondition,thetradesurpluswillfallafteratimelagwhenthepriceeffectisfullypassedthroughintotheforeignmarket.

However,the'J-curve'explanationcannotbejustifiedforthecaseofChinabecausetherearenosignsofareversalinChina，sexportgrowthandhencethegrowingtradesurpluswiththeUSsixyearsafteranofficialrevaluationoftheRMBinJuly2005,whenthecommonlyacceptedadjustmentperiodisabout6to12months(KrugmanandObstfeld200927.Krugman,P.andObstfeld,M.2009.Internationaleconomics:theoryandpolicy,8thed.,NewYork:HarperCollinsPublishers.

Viewallreferences,p.448).ThisisinasharpcontrasttotheimmediateimprovementinChina'scurrentaccountwhentheRMBwasdevaluedbymorethan30%in1994.ThetradedeficitofUS$12billionin1993wasfollowedbyatradesurplusof$US5.4billionayearlater.Thus,the'J-curve'canberejectedasanexplanationofthegrowingtradeimbalancebetweenChinaandtheUS.

PolicyrecommendationstoaddresstheSino-UStradeimbalance

Jumptosection

1.Introduction

2.Tradeimbalanceissuesandthevalueof...

3.Policyrecommendationsto...

Aquantitativeassessment

•5.Conclusion

SincetheRMBisbelievedtohavebeensignificantlyundervaluedoverthelastdecade,GoldsteinandLardy(2006,2008,2009),EverardandChong(200715.Everard,B.andChong,T.T.-L.2007.TherevaluationandfutureadjustmentoftheRenminbi.TheChineseeconomy,40(5):6-20.[CrossRef]

Viewallreferences)andMorrison(200834.Morrison,W.M.2008.China-U.S.tradeissues,(RS33536)[online]Washington,DC:CongressionalResearchService.Availablefrom:

http://digitalcommons,ilr.C/keyworkp1ace/498/[Accessed16November2008]

Viewal1references)haveadvocatedasignificantrevaluationasakeyinstrumenttoeliminatethetradeimbalancesbetweenChinaanditsmajortradepartners,particularlytheUS.

Whilemany,ifnotmost,economistsareinfavo