Results

Table 3 [ PDF 19.6KB | 1 page ] presents the results for imports for processing. The coefficients on the exchange rate are positive and statistically significant in every specification, indicating that an appreciation of the integrated exchange rate will increase imports for processing. The coefficients indicate that a 10% appreciation of irer will increase imports for processing by between 3.9% and 4.1%. Although not reported in Table 3, these coefficients remain virtually unchanged if a trend term is included

In the preferred specifications in columns (2) and (5) that include processed exports but not the PRC's income, the coefficients on processed exports are close to unity. These results support the hypothesis of the IMF (2005) that there is approximately a one-for-one relationship between processed exports and imports for processing.

The IMF (2005) also posited that the exchange rate elasticity for imports for processing should be small because there are few domestic substitutes. However, the evidence discussed in Section 2, that interfirm transactions by FIEs in the PRC are increasingly taking place with other firms located in the PRC, suggests that the exchange rate elasticity may have increased in recent years. The exchange rate elasticities reported in Table 3 are only significant when data from 2005–2008 are included. Future work should investigate whether imports for processing have become more sensitive to exchange rate changes over the last few years as the PRC has developed more domestic substitutes to imported parts and components.

Table 4 [ PDF 16.8KB | 1 page ] presents the results for processed exports. The coefficients on the integrated exchange rate are negative and statistically significant in every specification, indicating that an appreciation in the PRC and other supply chain countries will reduce processed exports. The coefficients indicate that a 10% appreciation across East Asia will reduce processed exports by between 7.8 and 18.7%. Although not reported in Table 4, these coefficients remain highly significant when a trend term is included.

The coefficients on rest of the world income are positive and statistically significant in every specification, indicating that an increase in income in the rest of the world will increase processed exports. The coefficient values equal about 0.4 when the capital stock is excluded, and vary between 1.64 and 3.08 when the capital stock is included.

The coefficients on the capital stock are also positive and statistically significant in every specification. The coefficient values vary between 1.62 and 2.39. These values indicate that a 10% increase in the Chinese capital stock would increase processed exports by between 16 and 24%. These values are close to those reported by Cheung, Chinn, and Fujii (2010).

Table 5 [ PDF 22.8KB | 1 page ] presents the results for imports for processing using the yuan exchange rate as an independent variable instead of the integrated exchange rate. The coefficients on the exchange rate are positive and statistically significant in every specification, indicating that an appreciation of the yuan will increase imports for processing. The coefficients indicate that a 10% appreciation of the yuan will increase imports for processing by between 3.6 and 3.9%.

Table 6 [ PDF 22.8KB | 1 page ] presents the results for processed exports using the yuan exchange rate instead of the integrated exchange rate. The results indicate that an appreciation of the CNY would reduce processed exports. The coefficients on the yuan exchange rate are smaller that the coefficents on the integrated exchange rate. They average -0.77, compared with an average of -1.16 for the coefficients on the integrated exchange rate in Table 3. These results indicate that an appreciation throughout Asia would have a larger effect on processed exports than an appreciation of the yuan alone.

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