Exchange Rates Have Limited Impact on China’s Exports

170

China’s export landscape has evolved significantly since the 1990s, with a marked increase in value and sophistication. In 1995, total exports were valued at US$224 billion, with textiles comprising 30%, electronics 14%, and machinery 10%. Fast forward to 2021, and China’s total exports surged to US$3.7 trillion, with textiles accounting for 13%, electronics 26%, and machinery 19%.

During the COVID-19 pandemic, China’s prowess in producing technologically sophisticated products was further demonstrated. Notably, exports of serums and vaccines, which were less than US$1 billion in 2019, soared to over US$25 billion in 2021, primarily driven by Chinese-made COVID-19 vaccines.

Researchers Cesar A Hidalgo and Ricardo Hausmann introduced the concept of product complexity indices and country complexity indices (CCI). China’s CCI rose from 39th in 1995 to 18th in 2021, indicating an increased capability to produce sophisticated goods. The Asian Development Bank suggests that more complex goods are less affected by exchange rate appreciations, as they typically have fewer substitutes.

Before joining the World Trade Organization (WTO) in 2001, China mainly exported labor-intensive manufactured goods. Post-WTO accession, a surge in foreign direct investment (FDI) boosted confidence in China’s adherence to the rule of law. This influx of FDI, coupled with technological advancements and abundant Chinese labor, led to a significant increase in exports.

My upcoming research, conducted with Chen Chen and Nimesh Salike, delves into how bilateral exchange rates impact China’s exports across various product complexity levels. The study covers 1242 goods exported to 190 countries over time.

The analysis reveals that between 1995 and 2001, a 10% renminbi appreciation corresponded to a 6% fall in exports. Subsequently, between 2002 and 2004, a 10% appreciation led to an 8% decline. However, after the 2008 global financial crisis, a 10% appreciation had minimal impact on exports.

China’s top 15 export products underwent a transformation, with a shift towards higher sophistication levels. As China’s export basket becomes more sophisticated, the exchange rate’s influence diminishes. The depreciation of the Chinese yuan since April 2022 may not significantly stimulate exports, especially for high-end products like electronics and machinery.

China’s manufacturing exports, being more sophisticated and less sensitive to exchange rates, provide leeway for bolder exchange rate regime reforms. The Chinese government’s focus on high-tech manufacturing, supported by trade and industrial policies, positions the economy to withstand exchange rate shocks. However, future research should explore whether more sophisticated exports are also less responsive to tariff increases, particularly in the context of trade wars.