What determines China’s trade balance dynamics : a disaggregate analysis of panel data

China's huge trade surplus has attracted much interest around the globe from people of different walks of life. What has contributed to China's trade surplus has been a puzzle. Many researchers have attempted to discover the determinants that are responsible for China's trade imbalance but their findings are inconclusive or debatable. This paper offers new insights into the determinants of China's trade balance. In this study, the re-export role of Hong Kong in the trade of China's mainland is examined and the actual level of bilateral trade flows between China and each of its major trading partners is then re-estimated. Both these treatments are the first time employed in the literature, representing a major innovation in studying China's trade balance. The analysis with re-estimated trade data reveals that labour costs, income, foreign direct investment (FDI) and the exchange rate are all important determinants of China's trade surplus. However, the low labour cost has a much greater impact on China's trade surplus, followed by FDI. The exchange rate is also important but not as critical as many others have claimed. (J Asia Pac Econ/GIGA)