After the Chinese central bank removed the peg against USD, yuan appreciated but Chinese exports didn't seem to be affected. They are steadily increasing. How can this be explained ?
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2 Answers
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Different elements can contribute to such an evolution, without trying to be exhaustive, these are a few general comments:
- What happened to the real effective exchange rate? The evolution of the real effective exchange rate may differ from the nominal bilateral exchange rate with the USD to the extent that price evolutions in China (international competitivity) significantly differ from price evolutions in its main trade partners or to the extent that bilateral exchange rates of its main trading partners evolved differently from its exchange rate with the USD.
- Depending on the height of the price-elasticity of foreign demand for domestic exports and the price-elasticity of domestic demand for imports (and the initial current account balance), an inverted J-curve effect may appear.
- Increases in the income of China's main trade partners will result in higher demand for Chinese exports.
- Decreased Chinese income may have resulted in lower imports.
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Simple answer: Drawing on Ricardian model I can say the Chinese have not lost their comparative advantage in producing many types of manufactured goods. Yuan, on its way to appreciation, has to walk a few more miles to affect the comparative advantage that the Chinese possess.
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$\begingroup$ Anything related to relative inflation rates in trading partner countries, type of goods traded and the foreign income surge ? $\endgroup$ Commented Dec 4, 2015 at 19:27