How Would an Appreciation of the Yuan Affect the People’s Republic of China’s Surplus in Processing Trade?

Enormous trade surpluses are problematic for the Peoples Republic of China (PRC) and the rest of the world. They primarily stem from processing trade. This paper investigates how exchange rate changes would affect the PRCs imports for processing and processed exports. The results indicate that an appreciation throughout East Asian supply chain countries would reduce the PRCs surplus in processing trade, while an appreciation of the yuan alone might not. Even for an appreciation throughout East Asia, however, the sum of the exchange rate elasticities is not large. Thus, to rebalance the PRCs trade, exchange rate appreciations must be accompanied by other changes such as factor market liberalization and greater enforcement of environmental regulations.