International Parities among China and Her Major Trading Partners in Asia Pacific

Abstract

As China’s role in world economy has steadily grown, her importance to the international trading and finance has also increased apace. A joint investigation of the international parity conditions for China and her thirteen major trading partners in Asia Pacific is thus conducted. Monthly observations and sub-samples within 1986-2007 are being considered to accentuate the effects of institutional changes and financial crisis. Advanced econometric procedures including the heterogeneous panel and endogenous break tests for unit root and correction factor model for half-life estimation are utilized in the analyses. Our findings reveal that first, endogenous and exponential breaks are confirmed for the real exchange and real interest differential series, which mostly occur in 1988, 1993/94 and 1997/98. Second, RIP holds better than PPP, suggesting the greater financial integration than trade integration among APEC-China. The undervalued exchange rate regime may exert some drawbacks against the PPP theorem. Third, both parities tend to hold better in the post-liberalization and post-crisis era, attributed not only to the financial liberalization process among APEC economies, but also to the Chinese trade policy and the regional commitment for the ASEAN+3+2+1 cooperation. Fourth, APEC members have has improved their ability to absorb external shocks as indicated by the shortened half-life reported overtime, especially when the post-crisis era is included.PPP, RIP, Non-linear Endogenous Breaks, Panel Unit Root Tests, Economic Integration