How do China’s net exports to U.S. respond to RMB
appreciation? An empirical testing with respect to
the mechanical and electrical industry
Nan Hua
Bachelor Thesis
Catalogue
1. Introduction ... 1
2. Theoretical Framework ... 6
2.1 Marshall-Lerner condition... 6
2.2 Theoretical discussion ... 8
3. Literature review and variable chosen ... 11
3.1 Literature review ... 11
3.2 Regression model and variable chosen ... 14
4. OLS estimation and the results ... 17
5. Conclusion ... 20
1. Introduction
China became a full member of the World Trade Organization (WTO) in December 2001, which was a new landmark in China‟s opening up policy and hastened China‟s process to join the globalized world economy. At the same time, the issue on the exchange rate of Chinese currency Renminbi (RMB) has become an international focus. Since the year 1994, the Central Bank of China had been implementing a relatively fixed exchange rate policy, which informally pegged RMB to USD and allowed this rate to float only between 8.27 and 8.28. According to Bergsten (2010), the constant intervention of Chinese government in RMB‟s exchange rate has caused an everlasting undervaluation of the currency. In December 2002, Japan firstly brought up the request that RMB should appreciate in the OECD annual ministerial conference (Xiao, 2006), after that, similar demand was also made by the United States since 2003. On April 6th 2005, the US Senate ratified the Schumer- Graham bill with 67 percent agreements, which proposed a 27.5% appreciation of Renminbi within 6 months, or a tariff on all Chinese goods would be levied with the same ratio. Combing all the international factors and domestic needs for development, China announced that it would abolish the pegged regime in July 21st 2005, appreciate the RMB for 2 percent, and adopt a new “managed floating” regime referenced to a basket of 11 currencies and allowed fluctuation of 0.3 percent per day. Since then, RMB has been appreciating, and the exchange rate fluctuations are shown in Figure 1.
6.000 6.500 7.000 7.500 8.000
8.500
Exchange Rate CNY/USD 1998-2013
Figure 1
Source: International Monetary Fund
Due to the financial crisis, Chinese Yuan halted the process of appreciation in 2008, however, RMB has appreciated for 19% since the exchange rate reform in 2005. Under the pressure from both International Monetary Fund (IMF) and US government, RMB started to appreciate again from the latter half of year 2010. It is likely that Chinese Yuan will retain the trend of appreciation in the near future (Frankel, 2009). Thus, examining to what extent does the exchange rate influence trade terms is of great importance.
After the implementation of reform and opening- up policy in 1979 and the admittance in WTO in 2001, China‟s export commodity structure changed dramatically during the last 4 decades and its machinery industry has made a remarkable development, especially with regard to the export volume. These changes are shown in Table 1. In 1980, total mechanical and electrical products export volume was 1.39 billion USD, which only took a 7.7% part of total exports. While in 2010, the total export of mechanical and electrical products soared to 933.43 billion USD, and contributed the majority of total exports by 59.2%, which shows the great leap in exporting strength of mechanical products.
Table 1 China’s Export Commodity Structure 1980- 2010 1980 1990 2000 2010 Volume billion $ Proportion % Volume billion $ Proportio n % Volume billion $ Proportio n % Volume billion $ Proportion % Total exports 18.12 100 62.09 100 249.21 100 1577.75 100 Primary commodities 9.11 50.3 15.89 25.6 25.46 10.2 81.72 5.2 Manufactured goods 9.01 49.7 46.18 74.4 223.75 89.8 1496.22 94.8 Chemicals and related goods 1.12 6.2 3.73 6.0 12.1 4.9 87.59 5.6 Goods assorted according to raw material 4.0 22.1 12.58 20.3 42.55 17.1 249.15 15.8 Machinery and transport equipments 0.84 4.7 5.59 9 82.6 33.1 780.33 49.5 Miscellaneous goods 2.84 15.7 12.69 20.4 86.28 34.6 377.68 23.9 Unassorted goods 0.21 1.2 11.63 18.7 0.22 0.1 1.47 0.1 Mechanical and electrical products 1.39 7.7 11.09 17.9 105.31 42.3 933.43 59.2 High- tech products --- --- --- --- 37.04 14.9 492.41 31.2
Source: China Customs
When the main factors of China‟s rapid economic growth are analyzed, most of the economists suggest that the growth is export- dependent. Zheng, Bigsten and Hu claim in their paper that despite the trade surplus resulting from exports, “using exports to absorb excess domestic capacity has resulted in a large buildup of foreign reserves and rapid increase in the money supply, which in turn is fueling another round of excessive lending and investment, generating more excess capacity [in Chinese economy].”(2009, pp.877)
Meanwhile, also from Table 1, it is not hard to tell that the export of mechanical and electrical products plays an important role in China‟s international trade. Thus, whether there are any significant effects of China‟s mechanical and electrical exports due to currency appreciation worth discussing
In this paper, the United States is chosen as China‟s trade partner of interest and it is chosen for several reasons. First, as is shown in Figure 2, in 2010 the United Stated was China‟s second largest trade partner and it was the largest single country( while the EU is a union of several countries), which illustrates that the economic situation in the U.S. may also have an impact on China‟s export volume. Second, as one of the most important indexes of China‟s managed floating exchange rate policy, the value of U.S. Dollar is likely to help determine and forecast the current and future tendency of RMB exchange rate. Third, there has been an argument on whether RMB is undervalued between China and U.S. since long before, and the Schumer- Graham bill was not the only notable case. For example, on December 31st 2009, Nobel Laureate in Economics Paul Krugman published an article
Chinese New Year in the New York Times, suggesting that China‟s currency is so undervalued
that without an appreciation it would become another kind of protectionism. He even claimed that about 1.4 million jobs employment in U.S. would be reduced as a result of Chinese mercantilism (Krugman, 2009). Given all these arguments, the United States is a highly related country.
Figure 2
Source: China Customs
This paper will evaluate what the influences of RMB‟s appreciation on China‟s net export to U.S. in terms of the export volume of mechanical and electrical products, and the empirical researches will be done for the analysis. The paper is organized as follows. Section 1 is the introduction, and it presents the economic background of research question and the motivation of choosing this topic. In Section 2, a theoretical model about the impact of currency appreciation on international terms of trade, which is the Marshall- Lerner condition, will be explained. At the same time, some previous studies on the effectiveness of Marshall- Lerner condition will be discussed. After that, in Section 3 several literatures on the relationship between trade and exchange rate will be reviewed. Then the main variables for the empirical regression analysis in this paper will be characterized and how to gather the needed data will be introduced, including the net export volume of mechanical and electrical products from China to the U.S., exchange rate, the gross domestic product (GDP) of U.S.,
16.1 10 13 9.8 7.8 7 4.9 3 2.1 3.1 24.3
China’s Top 10 Cargo Trade Partner in 2010
Proportion in total trade volume
European Union Japan
United States ASEAN
Chinese Hong Kong South Korea Chinese Taiwan Australia Brazil
and three dummy variables. And then the regression analysis will be given in Section 4. Finally, Section 5 will be the conclusion of this paper.
2. Theoretical Framework
2.1 Marshall-Lerner condition
To analyze the impacts of exchange rate change on international trades, one of the very important theories is the elasticity approach, which was pioneered by Alfred Marshall at the end of 1890s. Later, in the 1930s, Abba Lerner went further into Marshall‟s studies and discussed the threshold elasticity value where a devaluation of currency can lead to a deterioration of the terms of trade. The combination of Marshall and Lerner‟s studies is central to the study of the relation between exchange rate and trade, and is introduced as the Marshall- Lerner Condition. Before the Marshall- Lerner condition, it is necessary to introduce the elasticity approach as the foundation.
The starting point of the elasticity approach is that there are two opposite effects of a devaluation on the international trades, one of which is the increase in exports due to cheaper exports, whereas the other is the decrease in imports. As a result, the total effect on trade volumes is ambiguous. To solve this problem, the elasticity approach separates total change in trade volumes due to exchange rate changes into two parts, the volume effect(ηx, ηm) , which
considers the demand for both exports and imports, and the price effect. According to Pilbeam (2013), the elasticity of demand for exports ηx is defined as “the percentage change in
exchange rate”(2013, pp. 57), while the elasticity of demand for imports ηm is defined as “the
percentage change in imports over the percentage change in their price as represented by the percentage change in the exchange rate” (2013, pp. 57). With regard to the price effect part, suppose the domestic export price is Px= Px, and the domestic import price is Pm= SP‟ where S
is exchange rate and P‟ is domestic import price in foreign currency. Then the sensitivity of
export price to currency fluctuation on export price is 0 x x P S dS dP
. And the exchange rate
change effect on import price is ' ' 1
S P S P P S dS dP m m
. That is to say, the total price effect
is 0-1= -1, and the total effect is x m1, which is the sum of volume effect and price effect.
The Marshall- Lerner condition suggests that under the assumption of current account equilibrium, if the sum of the demand elasticity for exports ηx and the demand elasticity for
imports ηm is greater than the price effect, that is x m 1, a depreciation of domestic currency can help improve the terms of trade and decrease net import, and vice versa.
To demonstrate how the changes of exchange rate impact international trades in reality, a straightforward way is to analyze from the aspect that the exchange rate changes may influence the products‟ relative prices in domestic and international market, which in turn affect the international trade. For example, if the Marshall- Lerner condition holds, then the appreciation of domestic currency will increase the relative price of domestic products and decrease the relative price of foreign products. As a result, the competitiveness of domestic exports is weakened but the import trade can be stimulated.
2.2 Theoretical discussion
There has been a widespread discussion in academia on whether the exchange rate fluctuations influence a country‟s trade balance, and the Marshall- Lerner condition is an important model to consider as mentioned above, but it is not the only theory discussed. In order to figure out the relationship between international trade and exchange rate, scholars are working on various theories and roughly forming two different views.
The first view is that exchange rate fluctuations can lead to trade balance changes to a great extent.
Krugman and Baldwin (1987) studied the puzzling persistence of the U.S. trade deficit, and analyzed several possible reasons for the current U.S. trade performance. They suggest that one of the crucial reasons is the high value of USD, which reduces the comparative productivity levels of U.S. and worsens the trade balance. Although the depreciation of USD cannot bring the trade deficit back to equilibrium, it does help eliminate the trade imbalance. Rose (1990) did an empirical examination on the relationship between the real exchange rate and the aggregate real trade balance for five major OECD countries in the post-Bretton Woods era: the United Kingdom, Canada, Germany, Japan and the United States. In his research, he argues that although theirs is not enough empirical evidence that confirms the Marshall- Lerner condition is satisfied, the strong relationship between exchange rate fluctuations and trade flow changes is not rejected. And as a matter of fact, currency appreciation does have some negative effects on the trade flow.
and they suggest that the reason why some empirical tests cannot find the relationship between real devaluations and the improvements of trade balance is the time lag due to J- curve effects. After the statistical measurements of the effects of the real exchange rate on the balance of payments, they get the result that the real exchange rate can be regarded as an exogenous factor influencing the trade balance, and the Marshall- Lerner condition is satisfied in the long run. When Frankel and Wei (2007) assess China‟s exchange rate regime, they also mention how exchange rate fluctuations affect multilateral trades. After the analysis they conclude that the appreciation of currency will decline the trade volume and decrease the trade balance.
Meanwhile, some scholars hold the view that exchange rate fluctuations do not exert significant impacts on the trade balance.
Dornbusch, Fischer and Startz (2008) point out that the Marshall- Lerner condition is not satisfied in all conditions. They suggest that even if the condition is satisfied, the introduction of return expectation would lead to a monetary expansion and negatively influence the trade balance. On one hand, the monetary expansion would lead to a lower interest rate, which increase the import volume and stimulate domestic aggregate demand. On the other hand, the lower interest rate and higher exchange value offset the export volume. Thus, whether the trade balance and net export deteriorate due to currency appreciation is also related to how reactive the aggregate demand to interest rate change is.
Sastre (2012) questions the sustainability of traditional version of the Marshall–Lerner condition, since he believed that one of the assumptions is not plausible in reality. After
several statistical discussions, he gets the conclusion that in the long run the balance of trade is improved, but the exchange rate variations cannot be regarded as the only for this improvement. Other factors such as the cross elasticity between exports and imports and the production of non- tradable goods should be taken into account as well. Therefore he proposed a reformulation of the original Marshall- Lerner condition, which also considers the cross elasticity between tradable exports and imports volumes. Bahmani, Harvey and Hegerty (2013) go through several literatures which have studied on the Marshall- Lerner condition, and examine the significance of previous studies‟ results. After the review of a wide range of empirical papers and the significance tests, they found that only 30 percent of the surveyed literatures get their statistical results accordant to their claims, namely the Marshall- Lerner condition does hold. Bahmani, Harvey and Hegerty also failed to show the expected relative price effects and the sum of import and export elasticity is not significantly differ from one, that is to say, the confirmation of Marshall- Lerner condition is still lack of evidence. As a result, the question of whether devaluation of currency would improve trade balance is unsettled.
Despite all those discussions above, this paper still assumes that the Marshall- Lerner condition holds, and the appreciation of RMB will have negative effects on China‟s trade balance, which is measured by the net export volume. At the same time, influences of other factors on China‟s mechanical and electrical net exports will also be examined in the empirical regression tests.
3. Literature review and variable chosen
3.1 Literature review
The extant studies focusing on the exports of mechanical and electrical are really rare and some of the earlier studies cannot be regarded as representative because of the policy adjustments. As a result, few articles exactly to this paper‟s research question can be found. However, with respect to China‟s currency appreciation and its effects on Chinese trade, there are several relevant literatures.
Eckaus (2004) claims in his paper that the great volume of Chinese export to U.S. has led to the discussion on China‟s unfair competition advantage due to low exchange rate and the calls for Chinese yuan‟s appreciation. To examine whether the rapid growth in China‟s exports is resulted from a depreciation of currency, he estimated an Ordinary least squares (OLS) regression on China‟s annual exports to the U.S. from 1985 to 2002. He does not find clear evidence showing that the rapid growth of China‟s exports is because of the currency depreciation, and argues that the increase of U.S. imports should also take the U.S. overall economic growth in account.
Meanwhile, Marquez and Schindler (2007) argue that previous studies and estimations have two limitations. First, the data used for empirical testing are not really reliable since most of the trade prices used are based on proxies for prices from other countries. Second, previous estimation samples did not include the influences of economic policies. Before the year 1978, China was almost a closed economy with centrally- planned economy regime, where exports level was quite low. In their testing, they use the monthly data from 1997 to
2006 and adopt the OLS model to estimate the coefficients for exports. Results show that although the response of imports is not certain, every 10% real RMB appreciation may lead to nearly 1% decrease in China‟s aggregate exports share. However, as they also mention at the end of their paper, whether the responses come from price responses or volume responses is not verified.
Baak (2008) studies the impacts of real exchange rates on trade especially between China and the U.S., as he believes that U.S. is the most important trading partner of China and U.S. had the largest market share of China‟s exports in the year 2004, taking 22.8% of the total exports. In order to examine the impacts of RMB‟s appreciation on trade volume, he firstly chose the quarterly data from 1986 to 2006. However, the Hansen (1992) stability test reveals great instability in the data selected, and the results of unit root tests suggested by Saikkonen and Lutkepohl (2002) perceived the year 1994 as a structural break for exchange rate, which may be because of China‟s exchange rate regime change and the RMB‟s depreciation from 5.796 to 8.702 per USD. As a result, Baak adjusts his data range and does the empirical tests from 1995 to 2006 using the cointegration test model (Saikkonen and Lutkepohl, 2000). Testing results show that every 1% depreciation of RMB would lead to a 1.7% increase in China‟s exports to the United States.
Cheung, Chinn and Fujii (2009) use China‟s trade prices and volumes to examine the exports‟ response to exchange rate change. They choose the time period from 1993 to 2006; use the China‟s exports as dependent variable for the OLS regression, while the U.S. GDP and real exchange rate are used as the primary independent variables. Unlike most of the studies,
Cheung et al get the results that the relationship between exchange rate change and trade flows is not always significant, and sometimes the direction of the effects can even be opposite from what is expected. Moreover, the RMB appreciation alone is not sufficient to reduce China‟s exports and trade surplus. But they do take the great uncertainty economic situations into consider and call for future studies.
Ahmed (2009) studies how sensitive Chinese exports are to exchange rate changes. He verifies the difference between processed exports1 and non- processed exports2, and uses both theoretical analysis and the empirical tests to figure out the exchange rate effects. Using the quarterly data from 1996 to 2009, his empirical results are highly consistent with the theoretical predictions. He concludes that when Chinese RMB appreciates, the negative impact on exports to developed trading partners will be dampened.
Thorbecke and Smith (2010) also work on the effect of RMB appreciation on China‟s exports. Different from the studies mentioned above, they include the effect of other East Asian currencies as well. Using the dynamic OLS estimation, they choose a panel dataset of China‟s annual exports to 33 countries over the time period 1994-2005, and a trade- weighted exchange rate is adopted in the regression as real exchange rate. Their empirical testing results indicate that “An RMB appreciation alone would primarily affect ordinary exports3” (Thorbecke and Smith, 2010, pp.96). And as a matter of fact, whenever the RMB appreciates by 10%, the China‟s ordinary exports would reduce by 12% sequentially and the processed
1. Ahmed (2009) defined in his paper that processed exports are “produced using parts and components imported from abroad”.
2. According to Ahmed (2009), non- processed exports are “largely sourced from domestic inputs”.
exports would also reduce by about 4%.
3.2 Regression model and variable chosen
Following the previous empirical studies, this paper will also use Ordinary Least Squares to examine how the mechanical and electrical net exports from China to U.S. response to exchange rate and other factor changes, and all empirical data will be analyzed in STATA. The main variable for analysis in the estimation is China‟s net export of mechanical and electrical products (NX) to U.S., which is considered to be related to the real exchange rate of RMB/ USD (Sr), U.S. GDP (GDPUS), as well as three dummy variables including the exchange rate
regime, the financial crisis and China‟s admittance in WTO. Most of the data come from the statistical department of World Bank, U.S. Bureau of Labor Statistics and China Customs, and is retrieved from the Datastream. Considering the influence of China‟s economic and monetary policy changes and the development of industry productivity, the time frame chosen is from January 1997 to December 2013 and quarterly data are used.
Since the direct volume of mechanical and electrical net exports is not possible to get, here in the empirical test the data of exports and imports are gathered and the net exports is equal to the difference between exports and imports (NX= EX-IM). As is shown in Figure 3, the general trend of China‟s net export in mechanical and electrical products is upwards and the volume has increased dramatically from 1997 to 2013 despite the fluctuations.
Figure 3
Source: China Customs
To explain this dramatic increase, the first factor to take into account is exchange rate. In this paper, the real exchange rate is used. According to Pilbeam (2013), the nominal exchange rate only indicates the exchange price, which is the amount of RMB can be obtained in terms of one unit USD. However, in order to reflect the effects of purchasing power and competitiveness on international markets, the real exchange rate is a more proper index to
examine. The formula of real exchange rate is
P P S Sr '
, where S is the nominal exchange
rate, P‟ is the index of foreign price level (in this case the U.S.) and P is the index of the domestic price level (China). In this paper the index of CPI is chosen to indicate the price level.
The U.S. gross domestic product is another factor needs to be considered. Mankiw (2012) proposes in his book that as the GDP increases, the aggregate demand of goods also increases. In the short run, the domestic productivity is relatively fixed and thus more imports will be
0 50 100 150 200 250 300 350 400 450
Net Mechanical and Electrical Export to U.S.
1997-2013
in hundred million U.S. Dollarrequired. In the empirical regression, the real GDP is considered in order to rule out the effects of domestic inflation and to see the real economic growth. Although the data of real GDP cannot be found directly, the nominal GDP and price deflator are accessible. Then the division between nominal GDP and price deflator gives the real GDP level (Mankiw, 2012).
Besides the variables mentioned above, 3 dummy variables are added to help explain the irregular changes of net exports. One dummy variable represents the change of exchange rate policy to a managed- floating regime, which is denoted as POL, to rule out the political reason for currency appreciation. This is necessary since before the year 2005, the exchange rate regime in China was quite fixed and the rate was stable (characterized as 0), while after the new regime was implemented the exchange rate started to float (characterized as 1). Another dummy variable indicates the financial crisis emerged in 2007, which is denoted as FC, to help explain the possible abnormal GDP economic growth from 2008 to 2012. Within the crisis period, the dummy variable is set as 1; while in the other years it is set as 0. In addition, China‟s entry into the WTO in December 2001 helps reduced trade barriers and increase China‟s international trade volumes. According to Ahmed (2009), this event can be regarded as a structural break in the empirical testing, and in order to solve the WTO- related structural break problem, a dummy variable can be introduced. Before the admittance, the value of WTO dummy variable is 0 and since the first quarter in 2002, the value will be 1.
In order to make it clear, Table 2 shows all variables used and the expected effects direction on net exports, which are estimated based on the assumption of Marshall- Lerner condition and the perfect elasticity of China‟s mechanical and electrical exports, that is to say
China‟s net exports depends on how much imports the trading partner needs and is not limited by domestic production.
Table 2 Variables and Notations
Variable notation Expressed variable Expected effects
NX Net export
(In hundred million $)
Dependent variable
Sr Real exchange rate --
GDPUS U.S. real GDP
(In hundred billion $)
+ POL China‟s exchange rate regime
(Fixed as 0, floating as 1)
Significance matters FC Financial crisis in the U.S.
(Within the crisis period as 1)
Significance matters WTO China‟s entry into WTO
(After entry as 1)
Significance matters
4. OLS estimation and the results
In this paper‟s Ordinary least squares regression, the logarithms of the main variables (China‟s net export, real exchange rate, and U.S. gross domestic product) are measured for estimation in order to make the coefficients simple and direct. Results are shown in Table 3 and Table 4.
Table 3 Regression Results
lnNX Coef. Std. Err. t p> | t | 95% Conf. Interval lnSr -3.1418 0.6069 -5.18 0.000 -4.3551 -1.9285 lnGDPUS 13.9694 2.1840 6.40 0.000 9.6035 18.3354 POL 0.8585 0.1382 6.21 0.000 0.5822 1.1348 FC 0.2841 0.1305 2.18 0.033 0.0232 0.5451 WTO 1.6262 0 .1227 13.25 0.000 1.3808 1.8715 Constant -60.6631 10.2394 -5.93 0.000 -81.1314 -40.1947
Table 4 Regression Results
R- squared 0.9524 SSR 6.0326233
Adj. R- squared 0.9485 Root MSE 0.31193
Number of obs 68
Generally speaking, the empirical estimated results are consistent with the theoretical expected effect directions considering the signs of independent factors‟ coefficients. The p values show that these variables are all statistically significant at the significance level of 5%. Also, both R- squared value and adjusted R- squared value are quite close to 1, which indicates that the regressors are good at predicting the dependent variable (in this case the logarithm of Net export). According to Stock and Watson (2007), an R- squared value of 0.9524 reveals that 95.24% of the change in net exports can be explained by the changes in determinant variables.
As shown in Table 3 the coefficient on real exchange rate, which estimated as always negative, is -3.14. The result implies that holding all other factors constant, every 1% of the RMB real appreciation would lead to a 3.14% decrease in China‟s mechanical and electrical net exports to the USA. The U.S. real GDP coefficient, on the other hand, is positive and implausibly large. Eckaus also has the same problem in his testing, and he suggests that China‟s exports to the U.S. have increased sharply after 2001 in which period the U.S. economy was further developed, thus the estimated coefficient can be biased due to those movements and a longer time series is needed. However, in all literatures reviewed on empirical tests, the effect of U.S. real GDP (also in logarithm form) remains significant at
least at the significance level of 5%. In other words, the U.S. real GDP is a relevant variable but the size of its influence on net exports is questionable.
For the coefficients of dummy variables, the most important parameters are p- values, which indicate the significance of these variables. According to the results, the influences of exchange rate policy change and China‟s admittance to WTO are really significant. The impacts from policy change can be explained from the exchange rate change respect, as RMB has been appreciating since the managed- floating regime is adopted and the appreciation reduces net exports from the results above. Meanwhile, due to more favorable access to overseas markets and the reduction of trade barriers (Thorbecke and Smith, 2010) after the admittance to WTO, China‟s net mechanical and electrical exports to U.S. are less restricted and increase by a large scale. In addition, although the influence of financial crisis in U.S. is not as significant as other variables (p- value is 0.033 instead of 0.000), the crisis does have some effects on U.S. imports demand.
Apart from the OLS, Variance Inflation Factor (VIF) test and White test are conducted to examine the quality of this OLS estimation. First, the result of VIF test shows that Mean VIF of all variables is 2.82. According to Studenmund, there is severe multicollinearity if VIF is greater than 5 (2006, pp.258). Thus even though the possibility of multicollinerity in this OLS estimation cannot be rejected for sure, it is not an apparent problem for the explanatory variables. Besides, the results of White test are shown in Table 5 with the null hypothesis of homoscedasticity. Since the p- value is 0.0215< 0.05, the null hypothesis is rejected at the significance level of 5% and the random errors of regression variables can be heteroscedastic.
In order to get a better estimation, the OLS estimation is adjusted with the robust standard errors, and the results are shown in Table 6.
Table 5 White Test Results
Chi2(2
) = 26.63 Prob > chi2 = 0.0215
Table 6 Robust Regression Results
lnNX Coef. Std. Err. t p> | t | 95% Conf. Interval lnSr -3.1418 0.2963 -10.60 0.000 -3.7342 -2.5495 lnGDPUS 13.9694 1.5938 8.76 0.000 10.7834 17.1554 POL 0.8585 0.1350 6.36 0.000 0.5885 1.1284 FC 0.2841 0.0841 3.38 0.001 0.1160 0.4523 WTO 1.6262 0 .1612 10.08 0.000 1.3038 1.9485 Constant -60.6631 7.6817 -7.93 0.000 -76.3028 -45.5917 Comparing Table 3 and Table 6, the most important change after adjustments for heteroscedasticity is the p- value for the dummy variable of financial crisis. The reduction of this p- value from 0.033 to 0.001 indicates that the financial crisis in U.S. does have some impacts on China‟s mechanical and electrical net exports, and these impacts can be more significant as estimated in OLS.
5. Conclusion
China‟s mechanical and electrical industry has been developing rapidly during the last 2 decades and the exports volume on mechanical and electrical products is remarkable, which
makes up 59.2% of China‟s total exports in 2010. Meanwhile, the United States is regarded as one of China‟s most important trading partners. Thus the issue of what factors influence the trade flow between China and U.S. is worth discussing.
This paper mainly examines how an appreciation of RMB would affect China‟s mechanical and electrical net exports to U.S. by Ordinary Least Squares estimation. And quarterly data from year 1997 to 2013 are used in the empirical regression. Besides the real exchange rate, U.S. real gross domestic product is also chosen as an explanatory variable in the estimation and 3 dummy variables are added to avoid structural break of data sets, including China‟s change to managed- floating exchange rate regime, U.S. financial crisis and China‟s entry into WTO. Testing results show that China‟s mechanical and electrical net exports to U.S. would reduce by 3.14% due to 1% of RMB appreciation, and the U.S. GDP is positively correlated with the net export volume. Moreover, with all other variables constant, China‟s reform to a more floating exchange rate regime, U.S. financial crisis and China‟s entry into WTO all have some impacts on the net exports.
Nonetheless, there are still several limitations in this paper. One thing is that there‟s no distinction between the parts and whole machine exports in the empirical testing. As a result, the exporting structural change within the mechanical and electrical industry cannot be verified. In addition, the estimated coefficient of U.S. real GDP coefficient is implausibly high as mentioned above. A testing with a wider range of time series may solve this problem, yet further studies on the reason of this high coefficient value and with more proper estimations are needed.
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