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http://dx.doi.org/10.13106/jafeb.2020.vol7.no8.131

The Impact of China Exchange Rate Policy on its Trading Partners: Evidence Based on the GVAR Model  

ABBAS, Shah (School of Economics, Zhongnan University of Economics and Law)
NGUYEN, Van Chien (Department of Banking and Finance, Faculty of Economics, Thu Dau Mot University)
YANFU, Zhu (School of Economics, Zhongnan University of Economics and Law)
NGUYEN, Huu Tinh (Thu Dau Mot University)
Publication Information
The Journal of Asian Finance, Economics and Business / v.7, no.8, 2020 , pp. 131-141 More about this Journal
Abstract
This study is designed to investigate the impact of China exchange rate policy on its trading partners by using a country multi-dataset GVAR model. Our model includes samples of 30 countries, six from high-income, six from middle-income and eighteen from low-income countries. This study used annual time series data over the period 1992 to 2017. We constructed currency misalignment index and it provided some interesting features about the currency undervaluation and overvaluation. The results of the currency misalignment shows that China's Renminbi is structurally more undervalued over the sample period as compared to other countries, and fluctuation in major currencies effects the global trade around the world. The overall empirical results of the GVAR model indicate that RMB undervaluation affects the trade pattern and macroeconomic performance of China's trading partners. Overall, China's exchange rate undervaluation has mixed effects on trading partner's GDP, exports and imports. The devaluation of China's RMB efficiently stimulated China's exports and reduced imports. While, in some countries, this effect is reverse, the RMB undervaluation increases the GDP of partner countries and also increases their exports to China. The results confirm the strong and leading role of the Chinese Renminbi in the global trade.
Keywords
Exchange Rate Policy; Currency Misalignment; GVAR Model; Generalized Impulse;
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