THE J CURVE: CHINA VERSUS HER TRADING PARTNERS

Abstract

The short-run effects of currency depreciation are said to be different from its long-run effects. In the short run, the trade balance deteriorates and improvement comes after some time; hence, the J-curve phenomenon. Previous studies that tested the response of the trade balance to exchange rate changes in China employed aggregate trade data and provided mixed results. Indeed, most of them concluded that real depreciation has no long-run impact on the Chinese trade balance. In this paper, we disaggregate the data by country and using recent advances in time series modelling estimate a trade balance model between China and her 13 major trading partners. We show that real depreciation of the Chinese currency has a favourable impact on her trade balance with a few partners, especially the USA. Not much support is found for the J-curve hypothesis.

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