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http://dx.doi.org/10.13106/jafeb.2021.vol8.no11.0047

The Prominence of USD/CNY in China-EU and China-UK Trade  

BAO, Ho Hoang Gia (School of Finance, University of Economics Ho Chi Minh City, Department of Finance and Accounting Management, Faculty of Management, Ho Chi Minh City University of Law)
LE, Hoang Phong (Department of Finance and Accounting Management, Faculty of Management, Ho Chi Minh City University of Law)
Publication Information
The Journal of Asian Finance, Economics and Business / v.8, no.11, 2021 , pp. 47-66 More about this Journal
Abstract
Despite the dominance of the USD as a vehicle currency in non-US trade, most studies on the exchange rate-trade balance relationship ignore its importance. Some recent J-curve papers have proved that incorporating the role of USD as vehicle currency as a crucial determinant of trade balance can well reflect the reality of global trade and provide more detailed findings. Motivated by this new approach and by the fact that USD is substantially used in the trade between China and the EU and the UK, this paper scrutinizes how the vehicle currency USD and the bilateral exchange rates asymmetrically affect China's trade balance with each EU country and the UK. The results of NARDL estimation indicate that the USD models outperform the bilateral exchange rate (BER) models in terms of detecting significant long-run and short-run coefficients, which confirms the usefulness of the new approach. Also, this paper finds that the USD/CNY exchange rate cannot be neglected in China's trade with the EU and the UK, which can supplement China's policies on international trade and foreign exchange management.
Keywords
China; EU; Exchange Rate; J-curve; NARDL; UK; Vehicle Currency;
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