The Diminishing Impact of Exchange Rates on China’s Exports

China’s merchandise exports increased from $62 billion in 1990 to $3.6 trillion in 2022. In 1990, China’s exports equaled 1.9% of world exports and in 2022 its exports equaled 14.3% of world exports. China’s export juggernaut threatens firms and jobs in importing countries. How does the renminbi affect China’s exports?

Cheung et al. (2012) examined how Chinese aggregate exports deflated using the Hong Kong re-export unit value index responded to the IMF CPI-deflated real effective exchange rate and to export-weighted real GDP over the 1994-2010 period. Employing dynamic ordinary least squares estimation, they reported exchange rate elasticities that are correctly signed and statistically significant. These indicate that if the renminbi were 10% weaker, the long run level of exports would be between 9% and 16% higher.

Exchange rates may not affect China’s exports in recent years as they did during the period that Cheung et al. (2012) investigated. China’s export basket now includes many more advanced products such as machinery, electronics, chemicals, and vehicles than it did over the sample period that Cheung et al. investigated. As more sophisticated goods are harder to produce than simple goods, it is harder to find substitutes for these goods than it is for ubiquitous products. Since finding substitutes is harder, price elasticities should be lower for complex goods.

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