Rising Wages, Yuan Appreciation and China's Processing Exports

This study investigates the impacts of rising wages and the appreciation of the yuan on the structure of China's exports. China's exports are classified here as ordinary exports (OE) and two distinctive groups of processing exports, pure assembly exports (PAE) and mixed assembly exports (MAE). The data analyzed here are derived from panel data covering China's bilateral PAE and MAE trade with more than 100 trading partners from 1993 to 2013. Estimates of fixed effect models show that wage increases and the appreciation of the yuan reduced the proportion of assembly exports in China's bilateral exports. Specifically, for a 1% increase in Chinese manufacturing wages, the share of PAE in China's bilateral exports is expected to fall 1.6 percentage points and that of MAE to decrease by 1.1 percentage points; a 1% nominal appreciation of the yuan against the US dollar would be expected to lower PAE and MAE trade volume by 2.4 and 2.1 percentage points, respectively. The empirical results imply that rising wages and cumulative appreciation of the yuan have eroded China's comparative advantage in the assembly of products for international markets, resulting in substantial contraction of processing exports. The analysis provides a supply-side explanation for the fall of China's export growth