The Exchange Value of the Renminbi and China's Balance of Trade: An Emp irical Study

This paper aims at assessing the relationship between the exchange value of the Chinese Renminbi (RMG) and China's trade balance by means of some recent econometric techniques designed to evaluate the existence and the direction of causality. We find strong evidence suggesting that changes in the trade balance and each of its components Granger-cause changes in the exchange rate but no evidence indicating a causal link running from the exchange rate to the trade balance. Our results seem to be rather supportive of the accommodative role of the exchange rate proposed by the modern theory of the trade balance determination and not supportive of the existence of a J-curve in China's trade balance. Our finding of a bidirectional causal relationship between the real exchange rate and the price variables confirms the presence of a vicious circle hypothesis following currency devaluation. This has important implications for the discussions of impacts of the RMB devaluation on China's trade balance.

PRODUCTIVITY AND ECONOMIC GROWTH: AN EMPIRICAL ASSESSMENT OF THE CONTRIBUTION OF FDI TO THE CHINESE ECONOMY

We estimate the contribution of FDI to the efficiency and productivity growth in a cross-region regression framework, utilising China¡¯s provincial data from 1984 to 1997. We find a bidirectional causal linkage between FDI and productivity growth across the regions in China, suggesting that changes in FDI intensity Granger-cause changes in productivity, and vice versa. China¡¯s economic growth is found largely due to the rapid expansion of investment in fixed assets. Human capital development becomes increasingly important to the labour productivity growth, and FDI has certain effects on labour productivity but not so strong and significant. Thus, the contribution of FDI to China¡¯s technological progress through technology transfer is still not noticeable, and many regions in China still experience inefficiency. This raised the concern over the issue of how to improve economic efficiency and technology transfer in order to sustain China¡¯s rapid growth in the long run. It also concerns what kinds of development strategy and industrial policy toward FDI that China is to form.China, Growth, Productivity, FDI, Human Capital

Whither Currency Union in Greater China?

The paper attempts to evaluate the prospect of creating a currency union in the "Greater China" economic area including Mainland China, Hong Kong and Taiwan. Despite of the political deadlock and military confrontation in the Taiwan Strait, the Greater China area has experienced rapid and spontaneous regional integration in the past decades as a result of increasingly cross-border trade, foreign direct investment (FDI), technology contracts, and other arrangements in accordance with changes in comparative advantage and industrial upgrading in these economies. In this study, we focus on the symmetry in shocks that is perceived as one of the major preconditions of a currency union. In contrast to the previous studies, we investigate the time-varying correlation of supply and demand shocks by using the Kalman filter technique in order to reveal whether the Greater China economies show a convergence trend. We also examine the costs of forming a currency union in the area that are caused by the loss of monetary autonomy in each economy. Our results emphasize an increasing symmetry in demand shocks and, to a lesser extent, in supply shocks, implying that these economies would not suffer too much from abandoning their monetary policy as an instrument of absorbing shocks. Acknowledgements: An earlier version of the paper was presented at the 9th International Convention of the East Asian Economic Association in Hong Kong and the CITS Research Workshop at Yokohama National University, Japan. The authors wish to thank Rasmus Rffer, Masahito Kobayashi, Hiroyasu Uemura, Craig Parsons, Masaru Inaba, and participants in the conference and seminar for their helpful comments and suggestions. The authors wish to acknowledge the financial support of the JSPS through the Grant-in-Aid for Scientific Research (B), 116330059.Optimum currency area, structural shocks, vector autoregression, Kalman filter, output losses, Greater China

Identifying Shocks in Regionally Integrated East Asian Economies with Structural VAR and Block Exogeneity

In this paper we use a structural VAR model with block exogeneity to investigate if external shocks originating from the USA played a dominant role in influencing the macroeconomic fluctuations in East Asia during the period 1978-2007. The empirical results show a dynamic effect of external shocks, implying that, even though regional integration appears to be deepening and accelerating, especially after the recent global financial crisis, the influence of US shocks on real output fluctuations in the East Asian region is still very strong. The effects of Chinese shocks show an increasing trend over time, but the impacts are still small and not comparable with those of US shocks. The world oil price shock has become increasingly important in influencing the stability of real output growth in the region. The results from variance decomposition and impulse response analysis confirm the findings. Even though Japanese firms have established production networks in East Asia through trade and investment, and China has also grown rapidly and become a key regional country, the results suggest that US influence in the region is still asymmetric and strong. Therefore, it is difficult to conclude that shocks to the East Asian economies have become more regionally oriented.Structural vector autoregression; Block exogeneity; Monetary union; External shocks; East Asia

Towards an East Asian Monetary Union: An Econometrics Analysis of Shocks

This paper examines the viability of regional monetary integration in East Asia by focusing on the symmetry of shocks, which is one of the preconditions for forming an optimum currency area (OCA). We extend the conventional 2-variable structural VAR model by incorporating foreign (namely, US) variables, as well as real effective exchange rates to capture country-specific shocks in estimation. We also obtain similar estimates for European countries to check for robustness. Impulse response function analysis is conducted to measure the size of shocks and the speed of adjustment to shocks. The empirical results reveal that it is less feasible for East Asian economies to form an OCA than is suggested in previous studies, but they do imply that some sub-groups of the economies, such as some Asian NIEs and ASEAN economies, are more appropriate candidates as their underlying shocks are correlated and symmetric, and the speed of their adjustment to shocks is faster. Acknowledgements: The authors wish to thank Eiji Ogawa, Akira Kohsaka, Shin-ichi Fukuda, Yuko Hashimoto, Etsuro Shioji, Takatoshi Ito and Shujiro Urata for helpful comments. The first and second author thanks the JSPS for financial support through the Grant-in-Aid for Scientific Research (B), 116330059. The third author is most grateful for the financial support of the Australian Research Council.Optimum currency area, monetary integration, structural vector autoregression, East Asia

"Identifying Shocks in Regionally Integrated East Asian Economies with Structural VAR and Block Exogeneity"

In this paper we use a structural VAR model with block exogeneity to investigate if external shocks originating from the USA played a dominant role in influencing the macroeconomic fluctuations in East Asia during the period 1978-2007. The empirical results show a dynamic effect of external shocks, implying that, even though regional integration appears to be deepening and accelerating, especially after the recent global financial crisis, the influence of US shocks on real output fluctuations in the East Asian region is still very strong. The effects of Chinese shocks show an increasing trend over time, but the impacts are still small and not comparable with those of US shocks. The world oil price shock has become increasingly important in influencing the stability of real output growth in the region. The results from variance decomposition and impulse response analysis confirm the findings. Even though Japanese firms have established production networks in East Asia through trade and investment, and China has also grown rapidly and become a key regional country, the results suggest that US influence in the region is still asymmetric and strong. Therefore, it is difficult to conclude that shocks to the East Asian economies have become more regionally oriented.

Exchange rate pass-through and inflation in Australia, China and India: a comparative study with disaggregated data

This article analyses the exchange rate shocks and its pass-through to various level of prices in two emerging economies and one developed country by employing a structural VAR framework over the period 1990-2011. We assess the pass-through into import, export, producer and consumer prices in Australia, China and India in industries including mining, agriculture and manufacturing. We test whether the exchange rate pass-through to import prices is more complete in any particular sector and estimate the pass-through to consumer prices to investigate whether there is any linkage between the pass-through and the average inflation rate across these countries. The impulse responses indicate that exchange rates have less effect in the rising mining and natural resources prices in Australia than China and India. Moreover, pass-through of exchange rate to aggregate consumer prices is greater in China and India than Australia. This will have important policy implication for the monetary authorities

Modeling the Fractional Integration in Volatility Between the Greater China Financial Markets

The dynamics of the interrelationships among the financial markets in the Greater China area including Mainland China, Taiwan, and Hong Kong, is a noteworthy issue of economic research. This is not only because the financial markets in this region have grown rapidly over the past decade, but also because of the arguably asymmetric integration of the emerging Chinese economy with advanced countries in the real side of the economy and tight control over financial market. Since its establishment in the early 1990s, the Mainland Chinese stock market has expanded rapidly in terms of capitalization, turnover, and the new listings. Even though the stock markets in the Greater China region have developed independently and with different institutional features, cross-market linkages can be observed in terms of the increasing number of Mainland companies listed in the Stock Exchange of Hong Kong and closer economic ties in the Greater China region. It is believed common factors that affect all economies drive financial integration, while the emerging markets are more likely to be influenced by local events. Recently there have been a number of studies that assess the financial market integration by employing different GARCH models with time-varying conditional correlations. Despite the growing importance of the Greater China stock markets and their dynamic interactions, there have been only a few studies on this issue with a mixed result. Moreover, most of these studies have not analyzed the volatility dynamics of the Greater China stock markets in a multivariate framework, and there is hardly any extensive discussion of the presence of volatility persistence in these markets. This would create potential model misspecification and may generate biased results. In this study we employ a multivariate framework that incorporates the features of asymmetries, persistence, and time-varying correlations to examine the volatility dynamics of the Greater China stock markets (Shanghai A- and B-shares, Shenzhen A- and B-shares, Taiwan, and Hong Kong). The results indicate that the B-share markets do not exhibit significant asymmetric volatility (“leverage effect”), and return volatility in the A-share market is substantially higher than that in the B-share market before April 1997. Since then, this result is reversed. There is strong evidence of volatility persistence in all the markets, which is robust to changes in model specification. The Greater China stock markets apparently share a common degree of persistence (fractional integration) in volatility. Moreover, the Shenzhen and Shanghai stock exchanges are positively but not perfectly correlated with each other, with the strength of correlation increasing after the late nineties. Their correlations with the Hong Kong and Taiwan markets are much weaker, and they do not display any clear trends. These findings have important implications for hedging and portfolio management and diversification