The influence of USD/CNY foreign exchange rate, RMB NEER and spatial effects on China’s foreign trade

Abstract

Purpose

The purpose of this paper is to analyze the influence of different forms of RMB foreign exchange rates on Chinese foreign trade.

Design/methodology/approach

This paper constructed spatial panel model and Markov Chain Monte Carlo estimation method and collected the data of 25 countries’ (including China) quarterly macroeconomic data from first quarter of 1993 until third quarter of 2013 to conduct the data analysis.

Findings

This paper finds that USD/CNY, which is widely used in trade settlement, is more significant in effecting Chinese export. Totally, 1 percent appreciation of CNY against USD will lead to 1.532 percent decline of Chinese export, while 1 percent appreciation of CNY NEER only 0.42 percent. What is more, 1 percent increases of the volatility of USD/CNY results in 0.579 percent decline of Chinese export. As policy suggestions, we should further reform the foreign exchange derivative market in China, and provide more currency derivatives, so that the ability of Chinese economy to deal with foreign exchange risk could be improved.

Research limitations/implications

Effect of exchange rate on imports and exports relates to the future direction of China’s exchange rate policy. This paper claims that China should accelerate the construction of foreign exchange derivatives market, improving the ability to respond quickly to foreign currency risk.

Practical implications

First, denominated exchange rate has more significant impact on the Chinese export trade to other countries than effective exchange rate. Second, the RMB exchange rate fluctuations also significantly affect the export trade. Third, China’s import and export trade have significant spatial effect.

Social implications

This paper recommends the construction of the RMB currency futures market as soon as possible, providing a richer foreign exchange derivatives and other risk hedging instruments, thus to enhance the ability to respond to exchange rate risks.

Originality/value

This paper uses spatial panel model with the refined data to study various factors on the import and export trade, and thus more comprehensive analysis on the impact of the exchange rate on the import and export trade with other major countries.

Citation

Wang, H. and Zhu, J. (2016), "The influence of USD/CNY foreign exchange rate, RMB NEER and spatial effects on China’s foreign trade", China Finance Review International, Vol. 6 No. 3, pp. 304-318. https://doi.org/10.1108/CFRI-09-2014-0067