The economic and social effects of real exchange rate ─ Evidence from the Chinese provinces Ping HUA Clermont Université, CNRS, Université d'Auvergne, Centre d'Etudes et de Recherches sur le Développement International, BP 10448, F-63000 CLERMONT-FERRAND, France Tel : 00 33 1 39 14 81 25
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[email protected] for «INTERNATIONAL CONFERENCE ON SOCIAL COHESION AND DEVELOPMENT 20-21 January 2011, Paris, France OECD Development Centre, with the financial support of Fundación Internacional y para Iberoamérica de Administración y Políticas Públicas (FIIAPP)
Abstract Real exchange rate exerts different economic and social effects. If a real appreciation exerts positive effects on economic growth by exerting pressure on efficiency improvement and technological progress via workers’ motivation, education and capital intensity, it exercises negative effects by deteriorating the international competitiveness in tradable sector and thus by destructing employment. An econometric model is estimated by using the GMM system estimation approach and panel data for the 29 Chinese provinces and over the period from 1987 to 2008. The results show that the real exchange rate appreciation had a negative effect on the economic growth, higher in coastal than in inland provinces, contributing to a minimizing of the gap of GDP per capita between two kinds of the provinces. They show moreover that the real exchange rate appreciation acted negative effects on employment.
Key words: China, economic growth, real exchange rate.
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1. Introduction Since several years, China suffers more and more from international pressure in favour of the renminbi revaluation. However, the Chinese government has not surrendered to this insistent pressure because of the increased numbers of social unrests. Recently the primary minister Wen argued that “forcing Beijing to revalue its currency would lead to a disaster for the world, because many of exporting companies would have to close down, migrant workers would have to return to their villages. If China saw social and economic turbulence, then it would be a disaster for the world.” The worries of the Chinese government are comprehensive because an important empirical literature on export-led growth1 found the negative impact of real exchange rate overvaluation on per capita growth rates; and this is particularly true for developing countries: the more overvalued the currency, the lower the per capita growth rate. Dollar (1992) and Benaroya and Janci (1999) argue that the relative undervaluation of the Asian currencies compared with those in Latin America and Africa explained the higher growth in Asian region. Hausmann et al. (2005) showed that real exchange rate depreciation is one of the factors associated with the growth acceleration. Eichengreen (2008) argues that a more depreciated real exchange rate together with weak exchange rate volatility favours growth process. Rodrik (2008) and Berg and Miao (2010) argues that not only are overvaluations bad
but undervaluation is good for growth, particularly in developing countries. MacDonald and Vieira (2010) found that a more depreciated (appreciated) real exchange rate helps (harms) long-run growth especially for developing and emerging countries. The worries of the Chinese government are all the more comprehensive that the literature emphasizes that the main channel through which real exchange rate exerts on growth is the size of the tradable sector (especially industry), particularly for developing 1
The real exchange rate does not normally feature in economic growth models.
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countries. As the tradable sector suffers disproportionately from the institutional and market failures in developing countries, the depreciation of real exchange rate increases the relative profitability of investing in tradables, and acts in second-best fashion to alleviate the economic cost of these distortions; and inversely (Rodrik, 2008). The existing literature is mostly based on the data of cross countries. It does not allow incorporating the special characters of each country and thus analysing the precise channels through which real exchange rate acts on economic growth2. China provides an interesting country case study. China’s economic growth has increased very rapidly since the beginning of its transition towards a market economy in 1978. The annual growth rate of the real GDP per capita (2000=100) was on average 9.4 % from 1979 to 2009,3 contributing significantly to the reduction of global income poverty by lifting over 200 million people out of $1 per day poverty in the past three decades (World Bank, 2009). It is higher starting from 1994, passing from 8.0 % per year over the 1979-1993 period to 10.7 % over the 1994-2009 period. The speeding up of the economic growth is different according to the Chinese provinces4. It is
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Few papers identified the precise channels through which the growth effect of real exchange rate is generated.
Rodrik (2008) explained that one channel is the size of the tradable sector (especially industry). Montiel and Servén (2009) show that saving is unlikely the mechanism through which the real exchange rate affects growth. 3
See figure 3 in section 2.2.
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China is composed of 22 provinces (Hebei, Liaoning, Jiangsu, Zhejiang, Fujian, Shangdong, Guangdong,
Hainan, Shanxi, Jilin, Heilongjiang, Henan, Anhui, Hubei, Hunan, Jiangxi, Gansu, Shaanxi, Sichuan, Guizhou, Yunnan et Qinghai), four autonomous municipalities under the direct control of central government (Beijing, Tianjin, Shanghai and Chongqing) and five autonomous regions (Guangxi, Inner Mongolia, Ningxia, Xinjiang and Tibet). In our econometric analysis, the autonomous region of Tibet is absent short of statistics, the statistics of Chongqing, created in 1997, are included into those of Sichuan, which lead to restrain 29 provinces in a large conception in terms of "province".
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more pronounced in inland provinces5 with its annual average growth rate passed from 7.6% to 9.98% than in costal provinces6 (from 9.3% to 10.1%). The growth acceleration since 1994 has been accompanied by a reversal of the exchange rate policy of China. After a long period during which the Chinese government has systematically devalued the renminbi vis-à-vis the dollar, in 1994 it decided to stabilize and in 2005 to progressively revalue it. This policy led to a depreciation of real effective exchange rate of the Chinese currency against the currencies of its trade partners during the first period, especially strong from 1990 to 1993, and an appreciation during the period from 1994 to 1998, and in 2001, 2008 and 20097. It is therefore interesting to investigate the role of the real exchange rate in this growth acceleration, stronger in inland provinces than in coastal provinces. Has the appreciation of the real exchange rate contributed to speeding up or slow down the growth acceleration in China, and inversely? Is this contribution different in the two kinds of the provinces? No study, to our knowledge, analysed yet the growth impact of the real exchange rate in China. Most of the studies on China’s exchange rate policy analysed the misalignment of the renminbi (see Cline and Williamson, 2007 for a review); while a few studies analysed the effects of real exchange rate in real economy8. The objective of this study is to analyse the
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Inland provinces, eighteen in total, are: Shanxi, Jilin, Heilongjiang, Henan, Anhui, Hubei, Hunan, Jiangxi,
Gansu, Shaanxi, Sichuan, Guizhou, Yunnan, Qinghai, Guangxi, Inner Mongolia, Ningxia and Xinjiang. 6
Coastal provinces, eleven in total, are: Beijing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian,
Shandong, Guangdong and Hainan. 7
See figure 2 in section 2.1.
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Guillaumont Jeanneney and Hua (1996) and Hua (1996) showed positive effects of the real depreciation on
China’s exports. If the real appreciation decreased China’s manufacturing employment (Hua, 2007), it decreased however the urban-rural and coastal-inland income inequality (Guillaumont Jeanneney and Hua, 2001) and boosting labour productivity (Guillaumont Jeanneney and Hua, 2010).
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impact of real exchange rate on economic growth by investigating the precise transmission channels through which real exchange rate acts on growth. The issue of the possible impact of the real exchange rate on economic growth is an important one at this time a widespread currency war9 is in prospect (Cline and Williamson, 2010); and the main objective of the Chinese government is to keep a high growth rate to create enough employment. The rest of this study is the following. In section 2, after the presentation of the evolution of China’s exchange rate policy and of its economic growth, a statistical analysis shows a negative relationship between real exchange rate and the economic growth in China, stronger in coastal than in inland provinces. To understand this negative relationship, we present in section 3 how theoretically real exchange rate variations may exert (positively or negatively) multiple effects on economic growth. We identify three kinds of transmission channels through which real exchange rate influences economic growth: 1) input factors
(employment, education and capital intensity) channels, 2) tradable sector channels (exports, FDI and industrial sector) and 3) efficiency channels. We explain that if a real appreciation exerts positive effects on economic growth by acting pressure on efficiency improvement and technological progress via workers’ motivation, education and capital intensity (rarely studied in the literature), it exerts negative effects by deteriorating the international competitiveness in tradable sector and by destructing employment (traditional argument). Consequently, the sign of the total effects of real exchange rate on economic growth is theoretically ambiguous and only an empirical analysis can reveal it. From this theoretical analysis we draw our estimating strategy.
We define a function of economic growth which includes the real effective exchange rate beside more traditional factors which are themselves supposed to depend on the real exchange rate. In section 4, we estimate these functions by using a panel data which combine the
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Guido Mantega, Financial Minister of Brazil, said “We’re in the midst of an international currency war, a
general weakening of currency.”
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temporal dimension represented by annual data 1987-2008 and the spatial data represented by the 29 Chinese provinces. In conclusion we draw some policy implications.
2. Real exchange rate and economic growth in China: the evidence of styled facts A descriptive approach of the evolution of China’s exchange rate policy and of its economic growth suggests that the real exchange rate appreciation acts a negative impact on the economic growth, higher in coastal provinces than in inland provinces; and that the reversal of the exchange rate policy from currency depreciation to appreciation contributed to slow down the acceleration of economic growth more sensible in coastal than in inland provinces.
2.1. China’s nominal exchange rate policy and the evolution of its real exchange rate China’s exchange rate regime China’s exchange rate regime is the fruit of a long evolution from two exchange rates to a unique rate which remains tightly managed until now. During the first years of 1980s, the exchange rate policy played a little role, because foreign trade was largely planned. It is only since 1984 that national foreign trade societies should take international prices into account to fix the sale price of imported goods and the purchasing price of exported goods (Guillaumont Jeanneney and Hua, 1996). From 1981 to 1993 the export societies have benefited from a foreign exchange retention system. They could sell some of their foreign exchanges obtained from exports at an administrated rate of the dollar higher than the official rate (simultaneously applied to planned importations and capital transactions). At the end of 1986, the administrated rate became a swap market rate which was determined in the foreign exchange market, even still under the
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State’s control. The export societies continued to deliver one part of the foreign currencies obtained from their exports to the People’s Bank of China at the official rate, and sold another part, proportional to their retention quota, to the foreign exchange market at the swap rate. The foreign exchange retention rate has progressively increased up to 80% in 1993, so well that the swap rate became the principal rate for trade transactions at this time. From 1985 to 1993, the Chinese government devalued the two exchange rates against the dollar several times. These devaluations were not realized simultaneously most of the time. Often, one of the two rates stayed stable and played the role of a monetary anchor. It contributed thus to slow down inflation, and favoured the real depreciation of exchange rate (Guillaumont Jeanneney and Hua, 1996, Guérineau and Guillaumont Jeanneney 2000). The nominal and real depreciations vis-à-vis the dollar were in fact large (respectively 53 % and 37% for the official rate over the period from 1990 to 1993) (figure 1). On 1st January 1994, China radically changed its policy. The double exchange rate system was suppressed; the swap rate became the unique official rate for all transactions. The last one was officially a managed floating, but in fact strictly pegged to the dollar and maintained stable since then. On 21 July 2005, the Chinese authorities decide to revalue the renminbi of 2.1% vis-à-vis the dollar, to switch from the dollar peg to a basket10, and to allow the currency to float more freely11. Since this date, the renminbi was progressively revalued against the dollar. From 2005 to 2009 the renminbi appreciated of 17% in terms of dollars and its real bilateral rate appreciated of 18 % (Figure 1). The Chinese authorities have undertaken several reforms to improve the functioning of the exchange market permitting some flexibility in the short run, but the rate until now remains tightly managed.
10
The basket of currencies is undefined (like Singapore does). The four main currencies in the basket are the US
dollar, the euro, the yen and the won. 11
The US dollar against the RMB is allowed to float within a band of 0.3 percent around precedent daily rate.
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The evolution of the real effective exchange rate of China as a whole Real exchange rate conditions the international competitiveness of a country relative to its trade partners, and exerts multiple effects on real economy. It is the key variable in this study. It can be approximated by a real effective exchange rate index, calculated here as the product of China’s nominal effective exchange rate (weighted average of the renminbi exchange rates against the currencies of the main foreign trade partners of China) and the ratio of consumer price index of China to the weighted average consumer price index of the same main trade partners. According to this definition, a rise of the real effective exchange rate corresponds to an appreciation of the Chinese currency. The nominal effective exchange rate depends on the relative variations of the different bilateral exchange rates of the renminbi against the currencies of the main foreign trade partners and therefore it evolved differently from the bilateral exchange rate against the dollar. The evolution of the real effective exchange rate of the renminbi is different from that of the nominal one, due to the price differential between China and its partners which was positive during the depreciation period. From 1987 to 1993, the real effective exchange rate decreased at an annual rate of 7 % on average with a total depreciation of 43% during the seven years12. The drop was particularly strong in 1993 (17 %)13. From 1994 to 1998 the real effective exchange rate appreciated strongly (at an annual rate of 9% on average, i.e. 52 % during the whole period of these five years). Since then, it experienced some weak depreciation as the nominal one except for the year 2001, when it appreciated of 6.4%. The real exchange rate appreciated
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From 1979 to 1993, the real effective exchange rate decreased at an annual rate of 7.7 % on average per year
with a total deprecation of 72% during fifteen years. 13
The drop was even more important in 1981 (44%) when the foreign exchange retention system and the double
exchange rate system were introduced and 1986 (29%) when the administrated rate became a swap market rate.
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again in 2008 (12%) and in 2009 (6%) (figure 2). This led a total real appreciation of 62.5% during the period from 1994 to 2009, i.e. at an annual rate of 1.59% on average.
The evolution of the real effective exchange rate of the Chinese provinces The change in real effective exchange rate varied from one province to others in China. This disparity results from two factors (Guillaumont Jeanneney and Hua, 2001, 2002). The first one is the diversity of their foreign trade partners, as each province tends to trade more with its border countries14. Therefore the weighting of the foreign currencies is different. The second factor is a considerable difference between provinces’ inflation15. From 1987 to 2009, average annual rate of inflation has ranged from 5.7% in Henan province to 8.0% in Beijing municipality. These differences are themselves due to several reasons: the differences in Chinese provinces’ production and consumption patterns and external trade, the fiscal and monetary policies largely decentralised in China and very different from one province to another (Guillaumont Jeanneney and Hua, 2004). From 1987 to 1993, the annual average depreciation of the real effective exchange rate in Chinese provinces varied from 6.9% for Guizhou to 2.8% for Beijing, while during the period from 1994 to 2008, the average appreciation varied from 1.14 % for Guangdong to 3 % for Qinghai (Table 1)16. The real depreciation during the period from 1987 to 1993 as well as the real appreciation during the recent period from 1994 to 2008 has been slightly lower in the 14
Guillaumont Jeanneney and Hua (2002) reported in this same review the share of imports of each province
from the 20 main partners (see appendix A, pages from 153 to 156). 15
as illustrated in the figure reported in Guillaumont Jeanneney and Hua (2002, page 135) .
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One exception concerns Yunnan which did not experience an appreciation of its real exchange rate during the
recent period, mainly due to inflation less high than that of Myanmar as its 4th most important partner; the share of Myanmar in the total import of the Yunnan province is equal to 6.8% and the inflation was 1528 % in Myanmar over the period from 1994 to 2007.
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coastal provinces than in the inland provinces: the annual average rate of depreciation was 4.41 % in coastal provinces against 4.84% in inland provinces and the real appreciation was 1.77% in the coastal provinces against 2.01% in the inland provinces. According to the impact of the real exchange rate upon economic growth, these differences might have contributed to increase or decrease the growth gap between the two kinds of provinces.
2.2 Economic growth in China as a whole and in the provinces The evolution of the economic growth in China as a whole The economic growth is calculated in this study as the ratio between the GDP expressed in 2000 constant prices and total population. Figure 3 shows the evolution of economic growth in China as a whole since 1978, the year which marked the beginning of China’s economic reforms inside the country and of its openness policy to the outside. The economic growth in China increased dramatically, passing from 1 267 yuans per capita in 1978 to 20 296 yuans in 2009. It is multiplied by sixteen over the 31 years, which corresponds to an annual average growth of 9.4 %. From 1987 to 2009, the economic growth was weak only in two years (2.8% in 1989 and 3.7% in 1990); while during the other years it was at least 7.8%. The economic growth slowdown during these two years was probably due to the break in the reforms after the student movement in Tiananmen Square. China’s economic growth accelerated from 8.01% during the period 1979-1993 to 10.68% during the period from 1994-2009.
The evolution of the economic growth in the Chinese provinces The economic growth did not increase at the same rate in the different Chinese provinces as in the different periods. The annual average rate of economic growth varied from
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7 % for Qinghai to 12 % for Zhejiang during the period from 1979 to 2009. The economic growth varied from 5.5% for Qinghai to 12.1% for Guangdong during the period from 1987 to 1993 and between 7.3% for Xinjiang and 14% for Inner Mongolia from 1994 to 2009 (table 1). All the Chinese provinces (except Fujian, Guangdong, Hainan and Xinjiang) have experienced an acceleration of economic growth since 1994, but at a different rate (table 1). The speeding up of the economic growth is more pronounced in inland provinces with its annual average growth rate passed from 7.6% during the 1987-1993 period to 9.98% during the 1994-2009 period than in costal provinces (from 9.3% to 10.1%). The economic growth was more than doubled in three inland provinces (Anhui, Qinghai and Inner Mongolia) and in one coastal province (Tianjin) because their economic growth is particularly weak. On the contrary, among the four provinces which did not meet the growth acceleration during the recent period, Guangdong and Hainan suffered from the strong deceleration of the economic growth which passed respectively from 13% to 9.7 % and from 13% to 7.8%. This provincial discrepancy of economic growth is not surprising as the factors of economic growth have not evolved similarly in the different provinces and in the different periods. In a general way, we observe a higher economic growth in coastal than in inland provinces during the period of the real depreciation, while this high gap of economic growth diminished strongly during the second period of the real appreciation (table 1). The coastal provinces benefit from many coastal advantages relative to tradable sector: they have a dynamic industrial sector producing more light industrial goods and largely oriented towards outside; receive more FDI, and suffer from less constraint of credits and foreign exchanges in order to import machines and equipments17 and have more private industrial enterprises and
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Fleisher and Chen (1997) showed that the weak presence of foreign direct investment in the inland provinces
contributed to explain the productivity gap relative to coastal provinces.
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attract more educated labour. The real depreciation may have stimulated these coastal advantages, leading a higher economic growth in coastal than in inland provinces; while the real appreciation has probably exerted negative effects on the coastal advantages, and may have slowed down the growth more important in coastal than in inland provinces. Consequently, it is expected that the growth elasticity of real exchange rate is higher in coastal than in inland provinces.
2.3. Real exchange rate and growth: the evidence of stylized facts The figure 4 presents the relationship between the real exchange rate appreciation and economic growth in China over the period from 198718 to 2009. We observe a negative relationship between the real appreciation and the growth rate of real GDP per capita. During the years when the renminbi appreciated, the economic growth slowed down. Inversely, during the years when the renminbi depreciated, the economic growth increased. The figure 5 shows the relationship between the real effective exchange rate and real GDP per capita on average over the period from 1987 to 2008 for the Chinese provinces. As waited, we observe that the negative impact of real exchange rate appreciation on the real GDP per capita is stronger in coastal provinces than in inland provinces. The strong depreciation during the period from 1987 to 1993 may have stimulated the economic growth more importantly in coastal provinces than in inland provinces; while during the recent period from 1994 to 2009, the real appreciation may have slowed down the economic growth stronger in coastal provinces than in inland provinces. Consequently, the real depreciation of the renminbi may have contributed to an increasing gap of economic growth between the two categories of the provinces (at an annual average rate of 9.3% for coastal provinces and 6.4% for inland provinces); while the real appreciation may have slowed down the real GDP per 18
when the swap market rate replaced the administrated one.
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capita divergence between the two categories of the provinces (respectively 10.8% and 9.98%). This satisfying evolution might be due to the reversal of the exchange rate policy in 1994, all the more that the depreciation and the appreciation of the real exchange rate are larger in inland provinces than in coastal provinces (Table 1). The fact that the real appreciation of the renminbi exchange rate slowed down the economic growth acceleration particularly marked in coastal provinces and inversely, incites us to identify the transmission channels through which the real exchange rate could have been acting on economic growth in the two categories of the Chinese provinces during the last twenty years. This is the objective of the next section.
3. Why has real exchange rate appreciation affected negatively economic growth in China: a theoretical analysis The factors that could affect economic growth are numerous in an economy in transition towards a market economy such as China, where economic policies and productive structures have dramatically changed. A plethora of literature argues that China’s economic growth can be explained by the rapid expansion of the industry (Lin and Liu, 2008), the external openness with the development of manufactured exports (Fu and Balasubramanyam, 2005; Kraay, 2006) and foreign direct investments1 and the promotion of the private sector in disfavour of the sector of state-owned enterprises (SOEs) (Jefferson and Su, 2006 ; Dougherty et al., 2007). The role of employment and human capital is generally recognized as positive factors of growth (Fleisher and Chen, 1997; Zhu, 1998; Wang and Yao, 2003). All these factors may be potentially affected by real exchange rate, and thus may be transmission channels through which its growth impact passes. Finally, the real appreciation may exert a direct action on work efficiency by modifying the real remuneration of workers and
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exacerbating competition (Guillaumont Jeanneney and Hua, 2010). We explain that if a real appreciation exerts positive effects on economic growth by acting pressure on efficiency improvement and technological progress via workers’ motivation, education and capital intensity, it exerts negative effects by deteriorating the international competitiveness in tradable sector and by destructing employment. Consequently, the sign of the total effects of real exchange rate on economic growth is theoretically ambiguous and only an empirical analysis can reveal it. From this theoretical analysis we draw our estimating strategy. We define a function of economic growth which includes the real effective exchange rate beside the above mentioned factors which are themselves supposed to depend on the real exchange rate.
3.1. Real exchange rate and the size of tradable sector Real exchange rate measures the relative price of domestic goods relative to foreign ones and is an indicator of international competitiveness of a country. The most traditional argument in favour of a negative effect of real appreciation upon economic growth is based on the assumption that real exchange rate appreciation deteriorates the competitiveness of enterprises vis-à-vis their foreign competitors and therefore decreases exports. This deterioration diminishes thus the profits of the exports sector (which roughly means industry of manufactured goods in the case of China) in favour of services and agriculture, largely protected from foreign competition (Guillaumont Jeanneney and Hua, 2002). It decreases industrial self-financing and the will to invest in the industrial sector, and more generally in the tradable good sector. If this last one is the most efficient and innovating, real appreciation may act negatively on growth, beyond its impact on mainly exporting firms. Real appreciation is particularly bad for growth in developing countries because it does not allow promoting the
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small and inefficient tradable sector, which suffers disproportionately from the institutional and market failures (Rodrik, 2008). The negative effect of real appreciation on the growth also channels through the decrease of foreign direct investments (FDI). In China, as in other developing countries, foreign investments are concentrated in the sector of tradable goods. Foreign firms bring technological improvements and their know-how to China. This positive action occurs through the creation of foreign companies or joint-ventures that are more productive than domestic firms, suppliers or customers of the foreign enterprises (Sun, 1998). Hale and Long (2007) and Liu (2008) explain that FDI diffusion or spill over effects are not necessarily positive. However many studies show that this positive effect exists in China, in particular in the manufactured sector where the main part of foreign direct investments go19. Finally, as the stated-owned enterprises are mainly in the heavy industry and the public services and, being protected from outside competition, they mainly produce nontradable goods, real appreciation favours them. The private, collective and foreign firms are freer in workers’ hiring and in their management than state-owned enterprises and generally more productive. Henceforth, real appreciation exerts a negative impact on growth by increasing the relative importance of state-owned enterprises. In China, the tradable sector is particularly concentrated in coastal provinces, whose exports represented 91% of the total exports in 2009. As the size of tradable sector is much important in coastal provinces than in inland provinces, it is expected that the negative effect 19
Sun, Hone and Doucouliagos (1999) have used data relative to 28 manufactured sectors in the 29 Chinese
provinces in 1995 and have shown that trade and financial openness is a factor of industry efficiency. Later, Li et al. (2001) and Buckley et al. (2002) have evidenced the diffusion effect of FDI to Chinese manufactured enterprises thanks to data of the industrial census, and Liu et al. (2001) to electronic enterprises with data relative to 41 sectors in 1996 and 1998. FDI spill over has also been captured thanks to data relative to the performance of Chinese towns in 1990 and 2002 (Madariaga and Poncet, 2007).
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of real appreciation is more sensibly in coastal provinces than in inland provinces; and inversely.
3.2. Real exchange rate and workers’ effort A real exchange rate appreciation increases real remuneration of non-qualified work expressed in tradable goods20. We suppose that this increase induces an efficiency improvement of workers in a country where the wages of unskilled workers are still low (Guillaumont and Guillaumont Jeanneney, 1992). As early as 1957, Leibenstein stressed that in developing countries a labour remuneration that is too weak might spoil workers’ health and their working capacity and showed that the motivation of workers acts on the efficiency, what he called the “X-efficiency” (Leibenstein, 1957, 1966). This hypothesis appears relevant in the case of China. Although the proportion of the poor population (with an income no more than one dollar a day21) has been decreasing rapidly since 1978 (still 16.6% in 2001, it passed to 10.3% in 2004, and to 4% in 2007), China has the highest number of poor population in the world after India (World Bank, 2009). The population just over the line of poverty remains highly vulnerable, notably in inland provinces where the wages are significantly lower than in coastal provinces. The impact of a real appreciation on workers’ effort could be thus stronger in inland provinces than in coastal ones. Second, a real appreciation could push firms to improve their technical efficiency in a context of monopoly or collusive oligopoly (Krugman, 1989). The argument is the following: managers only benefit from a part of the profit induced by a better management or a stronger
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In terms of tradable goods and in terms of consumption goods which include the two kinds of goods.
21
Exactly 2.15 and 1.08 dollars by measuring the expenditures in 1993 international prices (World Bank World
Development Indicators, 2004).
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effort since a part of the profit goes to the owners of the enterprise. In the case of monopoly, managers do not choose the exertion which maximizes the profit for such reasons as a preference for leisure over work, involvement in seeking out other profitable opportunities, and the power and satisfaction gained from having an excess number of employees (Baldwin, 1995). As Marshall said, the better profit of a monopoly is a quiet life. In a situation of oligopoly (due to foreign competitors and competitors localised in other provinces), the managers will choose a higher level of effort by eliminating excess labour or possibly by introducing labour-saving techniques that were not fully exploited prior to the competitive disturbance. They do so not only because this behaviour may increase the profit in the short run, but also because the decrease of costs dissuades competitors from entering into the market and thus avoids a fall in the price. Due to this strategic yield, there exists an additional benefit induced by the effort which may push management effort near to its optimum22. In a more general manner, in any market structure, the intensification of foreign competition due to currency real appreciation is favourable to the productivity of manufactured firms as some of them are obliged to close the less performing factories or even to disappear; it is a kind of Schumpeterian “creative destruction” benefiting to the most performing enterprises. This argument is realistic for China: under the pressure of the renminbi appreciation since 1994, and notably since China’s adhesion into the WTO in 2001, the Chinese firms have been more and more exposed under high foreign competition and a large number of firms (notably public ones) were obliged to reform their management or to be closed.
22
Voir Krugman (1989) p. 133.
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Besides the above direct favourable impact of a currency appreciation on workers and managers’ efficiency, a real appreciation may affect economic growth by acting positively on the education level and the capital labour ratio, but negatively on employment.
3.3. Real exchange rate, capital intensity, human capital and employment A real appreciation reduces the relative cost of imported capital goods and increases wages relative to capital price. It induces a more capitalistic production, encourages technological innovations (Leung and Yuen, 2005) and thus increases growth. It increases the real remuneration of workers expressed in tradable goods. We may suppose that the rise in wages incites young people to increase their education level and that it slows down the emigration of the most skilled workers (Harris, 2001). China has endured a significant brain drain and we observe in present time some Chinese educated workers coming back thanks to a better remuneration. The improvement of the education level of workers is recognised as being an important factor of economic growth (Fleisher and Chen, 1997; Hua, 2005; Liu and Li, 2006). Finally, a real appreciation of exchange rate acts on employment via the relative cost modification of imported inputs and workers, via export activities and via the efficiency in the use of labour. Firstly, it decreases the cost of imported inputs and leads to higher real wages expressed in tradable goods. This leads the switching of factors from workers to imported inputs, and is unfavourable to employment by increasing labour productivity. Secondarily, a real appreciation decreases the competitiveness of national societies, and thus the tradable activities. It is unfavourable to employment in tradable sector. Thirdly, a real appreciation exerts pressure on efficiency improvement by increasing international competition and real wages, and thus a favourable to employment. Using the panel data of the 29 Chinese
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provinces for the period 1993-2002, Hua (2007) showed statistically significant negative effects of the real appreciation of the renminbi on manufacturing employment. Table 2 summarizes the multiple effects that the real exchange rate variation is supposed to exert on economic growth in China. It distinguishes the effects of real exchange rate variations on the workers’ efforts (here named direct effect) from the effects passing through the channels relative to the size of tradable sector and to the production factors, which are themselves affected by the real exchange rate (here called indirect effects). Three effects of the rise of the real exchange rate (or of its appreciation) on the economic growth are positive (work effort, capital/labour ratio, education level), while the five (exports, foreign direct investments, employment, relative importance of industrial production and of stateowned enterprises) are negative (cf. the third column of the table 2). The total action of the real appreciation of exchange rate on economic growth is therefore theoretically uncertain. The sole econometric estimation may reveal it.
3.3 The model to be estimated From the above theoretical analysis, we estimate an economic growth function in which we introduce the real exchange rate, together with other explanatory variables of economic growth such as capital intensity, employment ratio, education, exports, industry, FDI and public investments. We also introduce the level of a real GDP per capita lagged one period to test an eventual convergence effect of economic growth between provinces. Moreover, we suppose that the direct efficiency effect of the real exchange rate which exerts through the workers’ effort is all the more relevant that the workers are poor. Since the proportion of poor workers is higher in inland provinces than in coastal provinces, we test whether these direct effects are conditional to the geographical position of provinces, by
19
introducing a dummy variable for coastal provinces and its interaction term with the real exchange rate. As all the control variables are added into the equation, the coefficient of the real exchange rate measures only the effects that we do not capture by the intermediary variables and notably the direct effects on work effort, according to the second line of the table 2. •
ln y it = ln yit − ln yit −1 = a0 + a1 ln REERit + a2 ln KLit + a3 ln EM it + a4 ln EDU it + a5 ln X it + a6 ln IN it + a7 ln FI it + a8 ln SOEit + a9 ln yit −1 + a10C + a11 ln REERit * C + ηi + γ t + ε it Which can be in return written as following ln yit = a0 + a1 ln REERit + a2 ln KLit + a3 ln EM it + a4 ln EDU it + a5 ln X it + a6 ln IN it + a7 ln FI it + a8 ln SOEit + (1 + a9 ) ln yit −1 + a10C + a11 ln REERit * C + ηi + γ t + ε it Where y :per capital real GDP, REER: real exchange rate, KL : capital intensity, EM: share of employment EDU : education level, X : export share, IN: share of industrial production, FI : contribution of foreign direct investments to gross formation of fixed capital, SOE: relative importance of state-owned enterprises, C: coastal provinces The variables, except for dummy one, are expressed in logarithms so that the coefficients represent elasticities. The disturbance term consists of an unobservable provincial fixed effect that is constant over time η i , an unobservable period effect that is common across provinces γ t and a component that varies across both provinces and periods which we assume
20
to be uncorrelated over time ε it . The expected elasticity signs of all variables in the equation are positive, except for that of public enterprises share and of the interaction term between the real exchange rate and the coastal dummy which are expected negative. The direct growth effect of real exchange rate is estimated by a1 for inland provinces, and a1+a11 for coastal provinces. In the second step, we look for the growth effects of the real exchange rate which exert indirectly via the other variables that we have supposed explaining the growth: capital intensity, employment, education, exports, industrial production, foreign direct investments and state-owned enterprises (according to the second part of Table 2, line 2 and column 2). With this aim in view, we must estimate the impact of the real exchange rate on these factors. We add a dummy variable, which is equal to 1 for coastal provinces, to capture their comparative advantages as we explained before. We estimate separately the following equations. KLit = b0 + b1ERit + b2C + ηi1 + γ t1 + ε it1
(2)
EM it = c0 + c1ERit + c2C + ηi 2 + γ t 2 + ε it 2
(3)
Eduit = d0 + d1ERit + d2C + ηi3 + γ t 3 + ε it 3
(4)
X it = e0 + e1ERit + e2C + ηi 4 + γ t 4 + ε it 4
(5)
INit = f 0 + f1ERit + f 2C + ηi 5 + γ t 5 + ε it 5
(6)
FIit = g0 + g1ERit + g 2C + ηi 6 + γ t 6 + ε it 6
(7)
SOEit = h0 + h1ERit + h2C +ηi7 + γ t 7 + ε it 7
(8)
The expected elasticity signs of equations 2, 4 and 8 are positive, while the rest of equations are negative. We can then calculate the indirect effect of the real exchange rate on economic growth
21
as the sum of the products of economic growth elasticity relative to each intermediary variable multiplied by its corresponding elasticity relative to the real exchange rate (table 3).
4. The growth impact of real exchange rate in China: an econometric analysis We present successively variable calculation, estimation method and the results.
4.1. Estimation period and calculation of variables The panel estimation concerns the twenty-nine provinces and covers the period from 1987 to 2008, during which the real effective exchange rate either depreciated or appreciated (see figure 2). The panel is unbalanced, with some provinces having more observations than others. The means and standard deviations of the variables are provided in table 4, while their sources are given in annex 1. Per capita real GDP is calculated as real GDP (2000=100) divided by population. The real effective exchange rate indices of the Chinese provinces are calculated on the basis of year 2000=100, as the ratio of consumer price index of the considered province to the average consumer price index of its fifteen foreign trade partners23 (defined by geographical import origins in 199824), all prices being converted into the same currency as following: 15
REER j = ∏ ( NERij i =1
Pj α i ) . Pi
where REER represents the real effective exchange rate of the renminbi,
23
We unfortunately had to eliminate several ex-Soviet Union countries due to a lack of data on exchange rates.
24
This is the only year for which we obtained China’s General Administration of Customs data on import origin
for different provinces. We therefore suppose that each province kept the same partners throughout this period. We also used real effective exchange rates, supposing that the weights of each province are the same as national averages for China; this is not an ideal hypothesis given China’s size and the specializations of each province, as confirmed by econometric results (not presented here).
22
NERij is the nominal bilateral exchange rate of the renminbi in terms of currency of foreign partner i with i=1…..15. Pj corresponds to consumer price indices of the Chinese province j. Pi corresponds to consumer price indices of the country i
αi is the weight of each partner calculated as a relative share of the imports of the provinces j from its foreign partner i relative to the total of imports from its fifteen main 15
partners in 1998, with
∑α
i
=1.
i =1
Consequently, an increase of the real exchange rate corresponds to an appreciation of the Chinese currency or a decrease of the relative price of tradable goods. Given that from 1987 to 1993, China used two exchange rates, i.e. official rate and swap rate, the renminbidollar exchange rate is calculated for this period as a weighted average of these two exchange rates, taking part of imports financed by swap exchange market for weighting. The calculated weighted pre-1994 nominal exchange rate of the renminbi to the dollar is not equal for each province because swap rates differed between provinces. The data on provincial swap rates are available in Khor (1993). Although all the Chinese provinces shared the same single nominal exchange rate from 1994 on for the rest of the estimation period, their real effective exchange rates have evolved at different rates because provinces have different foreign trade partners and inflation rates. In fact, each province tends to trade more with its border countries, leading the diversity of their foreign trade partners. Therefore the weighting of the foreign currencies is different. The second factor is a considerable difference between provinces’ inflation due to the differences in Chinese provinces’ production and consumption patterns and external trade, the fiscal and monetary policies largely decentralised in China and very different from one province to another (Guillaumont Jeanneney and Hua, 2004). Capital intensity is the ratio of capital stock divided by the number of employees. We
23
use
the
inventory
permanent
method
to
calculate
the
capital
stock25,
as
KRt =(1−0.05)KRt −1 + IRt , where KR and IR represent respectively the capital stock and the investment (i.e. gross fixed capital formation) in constant prices and the annual depreciation rate is supposed 5 % as in preceding papers (Wu, 2001; Lin and Liu, 2008 and Zheng and Hu, 2006). We suppose that the initial capital stock in 1965 is equal to the real investment that year. This hypothesis does not influence capital stock calculation since 1986, because all the capital stock in 1965 has been amortized in 1985. Since capital depreciation data is available since 1993 for each province, the capital stock over the period from 1993-2007 is calculated as KRt = KRt −1 + IRt − DRt , where DR represents real depreciations, which are equal to nominal depreciations deflated by the price index of the investment in fixed assets. Thus, the depreciations of capital are different for each province and for each year, while preceding studies supposed a depreciation rate of 5% for all the provinces and each year. The real gross fixed capital formation is deflated by two series of prices (100=2000), which are successively available: the “price index of gross fixed capital formation,” drawn from historical data of National Accounts, available until 1995, and the “price index of investment in fixed assets” available since 1992, in China Statistical Yearbook. The first series is used for the period from 1972 to 1992 and the second for the following years. This combination is not a drawback, as in the overlapping years the two price series differ only marginally, as observed also in Holz (2006, p. 8). 25
Holz (2006) and Chow (2006) present an interesting debate on capital stock estimates for China. Instead of
using capital depreciation, Holz suggests evaluating the value of replacement with several complex but disputable conventions. Chow defends that subtracting depreciated capital instead of using replacement value allows one to take into account, not only equipment depreciation, but also quality deterioration and costs of maintenance and repair when the equipments are used beyond amortization period. We have followed traditional method as in Chow’s paper and most of the studies. Holz does not calculate capital stock for the Chinese provinces.
24
Employment ratio is the share of employed population relative to total one. Education is calculated as the ratio of the total number of graduates from secondary and higher level education to total population. The education data for 1982, 1990 and 2000 are respectively obtained from the 4th and 5th Population Census of China. The data for other years is obtained from the annual sample survey on population changes. The exports are reported to GDP and foreign direct investments to gross fixed capital formation. The share of industrial production is calculated as the part of the secondary sector (except for construction) in the GDP. The share of state-owned enterprises is the ratio of their investment to the total investment of enterprises.
4.2. Econometric method The Levin-Lin-Chu panel unit root test is applied to all the variables. The results of these tests lead to reject the null hypothesis of non-stationarity (see table 4). The principal potential econometric problem is the endogeneity of explanatory variables, a difficulty that is met in all the estimations on macroeconomic data due to simultaneity bias (we recall the double causality of the real exchange rate and the growth), to measurement errors of variables which are a particularly serious problem in China, and to the risk of omitted variables. Moreover the introduction of the lagged dependent variable renders the OLS estimator biased and inconsistent, as the lagged dependent variable is correlated with the error term even in the absence of serial correlation between ε it . As a precaution against the risk of simultaneity of the dependant and explanatory variables, we have lagged one year all these explanatory variables, i.e. real exchange rate and the other traditional determinants of economic growth, in the estimations. Moreover, we treated both the endogeneity problem and the problem of structural heterogeneity of the
25
provinces by using the system estimator of the one-step Generalized Moment Model (GMM) of Blundel & Bond (1998). This GMM system estimation approach combines an equation in levels in which lagged first-difference variables are used as instruments and a first-difference equation in which the instruments are lagged variables in levels26. The use of the lagged variables at least of two periods for endogeneous variables as instruments permits a consistent estimation of the parameters even in the presence of measurement error and endogenous right-hand-side variables (such as capital intensity, employment ratio, industrial share, education, export ratio, FDI ratio, and relative importance of SOEs in this study) (Roodman, 2009a, b). These lagged variables were completed by the addition of one instrumental variable, which is the difference between the province’s per capita GDP and the average per capita GDP of its foreign trade partners. This instrument results from the Balassa-Samuelson hypothesis (Guillaumont Jeanneney and Hua, 2002). The validity of the instruments is tested by using the Hansen over-identification test, and by verifying the sensitivity of estimated coefficients to reductions in the number of instruments (Roodman, 2009a, b). The results do not allow us to reject the hypothesis on their validity. The instruments are therefore independent of error terms.
4.3. Results of econometric estimations The econometric results are reported in tables 5 and 6. Before estimating respectively the direct and indirect effects of the real exchange rate on real GDP per capita, we regress the last one only on the real exchange rate lagged one period and the coastal dummy variable, dropping the other determinants of the real GDP per capita in order to obtain a first rough
26
Blundel and Bond (1998) showed that this estimator is more powerful than the first-differences estimator
derived from Arellano and Bond (1991), which gives biased results in small samples with weak instruments.
26
estimation of the total effect of real exchange rate (column 1 Table 5)27. Then we add the interaction term between the real exchange rate lagged one period and the dummy variable of coastal provinces (column 2 in table 5), in order to see if there exists a difference between both kinds of provinces as the theoretical arguments suggest. The obtained results show that the real appreciation of the renminbi could exert a negative effect on economic growth, and that this effect would be more important in coastal provinces than in inland provinces. The direct effect of the real exchange rate is estimated by adding the traditional determinants of economic growth (columns 3 in table 5) and the interaction term between the real exchange rate and dummy variable of coastal provinces (column 4 in table 5). All coefficients are statistically significant with expected signs. The coefficients of the real exchange rate in columns 3 and 4 represent its direct impact on economic growth, that not passing through intermediary variables. This effect has been identified as the sum of an incitation of real appreciation for workers and managers to make more effort. As expected, the coefficient of the real exchange rate is positive and equal to 0.08 for the inland provinces, and to zero for coastal provinces, as the coefficient of the interaction term between the real exchange rate lagged one period and the coastal dummy is negative and equal to -0.08 (column 4). This result was anticipated as income per capita is notably lower in inland provinces than in coastal provinces so that the improvement of the work remuneration has probably a stronger impact on the behaviour of the workers in inland provinces. Indeed the GDP per capita in inland provinces is equal to 45% of the GDP per capita in coastal provinces in 2009. We can also see from table 5 that all intermediary variables lagged one period have positive effects on economic growth, except for the importance of state-owned enterprises. The per capita real GDP is all the more elevated than the employment ratio, education and 27
The result may be biased by missing explanatory variables.
27
capital intensity are important. The elasticities are respectively estimated to 0.20, 0.34 and 0.13 (column 4 of Table 5). Second, the progressive openness to the outside of the Chinese economy appears as a factor of economic growth, as the coefficient of export ratio, industry share and FDI ratio are significantly positive (respectively 0.07, 0.04 and 0.01). Third, the economic growth is all the less high than the share of state-owned enterprises investments is important (coefficient equal to -0.09). Finally, again as expected, economic growth is on average higher in coastal provinces than in inland ones. The coefficient of the lagged variable is inferior to the unity so that economic growth is faster when the initial level is lower, in conformity with the usual convergence effect of the growth theory. Table 6 presents the estimation of the intermediary variables in function of the real exchange rate and the coastal dummy. It indicates, as expected, that the geographical position of the provinces (border of the sea) has a significant and positive impact on all the variables, apart from the importance of public enterprises which are concentrated in inland provinces. Again as expected, table 6 also indicates that real exchange rate exerts positive effects on capital intensity, by decreasing the relative price of imported equipment goods, on education by increasing its benefits and on the relative investment of state-owned enterprises which produce chiefly non-tradable goods; inversely a real appreciation exerts negative effects on export rate, industrial production share, foreign direct investment ratio and employment ratio, by diminishing international competiveness, while real depreciation exerts inverse effects. Thus all these variables are effectively transmission channels of the real exchange rate to economic growth. Calculation of the total effect of the real exchange rate on economic growth is given in the last column in table 3. As it resorts from table 6, the real exchange rate exerts a positive effect on capital intensity and education (with the estimated coefficients of 0.15 and 0.08
28
respectively), which themselves influence positively on economic growth (with the estimated coefficients of 0.13 and 0.34 respectively); this leads to an impact of the real exchange rate which is equal to 0.02 for capital intensity and 0.03 for education (table 3). Inversely the real appreciation exerts a negative effect on employment ratio, export ratio, industrial production share and FDI (with the estimated coefficients of -0.11, -1.27; -0.05, -2.36) which themselves influence positively economic growth (with the estimated coefficients of 0.20, 0.07; 0.04, 0.01); consequently, the indirect effects of the real exchange rate via employment ratio, export ratio, industrial production share and FDI ratio are negative and equal respectively to -0.02, 0.09, -0.002 and -0.02. Finally, the real appreciation favours the state-owned enterprises (with the estimated coefficient of 0.75) which are a negative factor of the economic growth (with the coefficient of -0.09): the indirect effect of the real exchange rate via SOEs is equal to 0.07 (table 3). In summary, the negative effect of real exchange rate through employment, exports, the industrial production share, foreign direct investments and state-owned enterprises prevails over the positive impact of an overvaluation of the real exchange rate through the capital intensity, the education level and efficiency. The total effect is thus sensibly different from the direct effect. The negative impact of a real appreciation now appears in both categories of provinces; it is a higher in coastal provinces (-0.16) than in inland provinces (0.08), due to the direct effect which mainly holds in the last ones. Not only the coefficients of the real exchange rate are significant, but the elasticity values also show that the results are economically relevant. During the period of the real depreciation from 1987 to 1993, the annual average growth rate of real exchange rate depreciation was 4.84 % in inland provinces and 4.41% in coastal provinces (table 2). the annual average economic growth rate has been increased by 0.15 % (0.03*4.84%) in inland
29
provinces and 0.49 % (0.11*4.41%) in coastal provinces. During these seven years, the higher economic growth rate in coastal than in inland provinces increased the relative gap of their GDP per capita (ie. the ratio of GDP per capita in coastal provinces to GDP per capita in inland provinces) which passed from 1.97 in 1987 to 2.27 in 1993 (figure 6), i.e. an increase of 1.95% per year on average28, knowing that the real GDP per capita was 4 122 yuans in coastal provinces, and 2 095 yuans in inland provinces in 1987. Inversely, during the period of the real appreciation and stabilization from 1994 to 2008, the annual average growth rate of real exchange rate appreciation was 2.01 % in inland provinces and 1.77% in coastal provinces (table 2). The annual average economic growth rate has been slowed down by 0.06 % (-0.03*2.01%) in inland provinces and 0.19 % (0.11*1.77%) in coastal provinces, minimizing thus the gap of economic growth in coastal than in inland provinces, which passed from 2.37 in 1994 to 2.28 in 2008 (figure 6), i.e. a decrease of 0.14% per year on average29. Thus, the phases of the real depreciation of the renminbi significantly contributed to increase the ratio of the GDP per capita in coastal provinces to that in inland provinces, while inversely, the phases of the real appreciation contributed to decrease it. The real appreciation seems to be a factor of reduction of income inequality in China, and inversely30. However, this favourable effect of the real appreciation is socially less visible than the employment destruction resulting from real exchange rate appreciation. The real exchange rate appreciation of 12% in 2008 and of 6% in 2009 destructed about 175 298 jobs in 2008 28
2.28/2.37= 0.96, which corresponds to a growth rate of the ratio of the GDP per capita of coastal provinces to
the GDP per capita of inland provinces equal to -0.14%. 29
2.27/1.97= 1.15, which corresponds to a growth rate of the ratio of the GDP per capita of coastal provinces to
the GDP per capita of inland provinces equal to 1.95%. 30
Guillaumont Jeanneney and Hua (2001) have shown that the real appreciation has contributed to decrease
urban-rural income inequality.
30
and 88 093 jobs in 2009, knowing its elasticity of employment ratio estimated to -0.11 (table 6).
5. Conclusion This study contributes to the literature by analysing the effects of real exchange rate on economic growth in China. The analysis of this relationship, which appeared particularly opportune in the case of China, showed that the real appreciation has exerted negative effects on the economic growth, which are higher in coastal provinces than in inland ones. While international pressure in favour of the renminbi revaluation is becoming more and more insistent, it is topic to know that, if the overvaluation may contribute to the decrease of the per capita GDP gap between coastal and inland provinces, it also destructs jobs particularly in tradable sector. Consequently, the Chinese government may continue to adopt a progressive revaluation policy while exports, industry and FDI are slowed down by the revaluation of the renminbi and economic growth mainly depends on outside oriented industry sector. A step by step revaluation policy would be allowing the induced growth by productivity improvement and human capital to compensate the loss of international competitiveness and the job creation in non tradable (service) sector by shifting the Chinese growth model to go towards a domestic consumption-led one.
31
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Figure 1. Evolution of inflation, nominal and real bilateral exchange rates (against dollar) in China (2000=100) 10 9
120
8 100
7 6
80
5 60
4
(oficial rate)
(consumer price, real bilateral rate)
140
3
40
2 20
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0
1
consumer price
real bilateral exchange rate
0
official rate
NB: here a rise of the exchange rate means a depreciation of the renminbi against dollar and viceversa. Source: China Statistical Yearbooks.
39
Figure 2. Evolution of nominal and real effective exchange rates in China 140
300
120
250
200 80 150 60 100 40 50
20
real effective exchange rate
2009
2008
2007
2005 2006
2004
2003
2002
2001
2000
1999
1997 1998
1996
1995
1994
1993
1992
1991
1989 1990
1988
1987
0 1986
0
nominal effective exchange rate
NB. A rise of the curb is appreciation of renminbi and a fall is depreciation. Sources. China Statistical Yearbook, IMF International Financial Statistics, and Khor (1993).
40
(NEER, 100=2000)
(REER, 100=2000)
100
Figure 3. Evolution of real GDP per capita in China and its growth rate 25000
18 16 14
20000
10 15000 8 6 10000 4 2 5000
0 -2 -4 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
0
real GDP per capita
growth rate
Source : China Statisacal Yearbooks
41
(growth rate)
(real GDP per capita)
12
Figure 4. Real exchange rate appreciation and economic growth in China, 1987-2009
12
2004
(real per-capita GDP growth ) 4 6 8 10
1994
2007
2006
1993
1995
2005
2000 2001 2002 2003
1992
1988
1999 1997
1991 1996
2008 2009 1998 1987 1986
1990
2
1989
4.2
4.4 4.6 ln(real effective exchange rate) lngy
4.8
Fitted values
NB. A rise of real effective exchange rate means the appreciation and inversely. Sources. China Statistical Yearbook, IMF International Financial Statistics, and Khor (1993).
42
Figure 5. Real exchange rate appreciation and economic growth in Chinese provinces over the period from 1987 to 2008 on average inland provinces Heilongjiang
9
10.5
coastal provinces
Jilin
ln(real per-capita GDP) 8.2 8.4 8.6 8.8
Shanghai
ln(real per-capita GDP) 9 9.5 10
Beijing
Tianjing Guangdong
Zhejiang Jiangsu
Liaoning Fujian
Shandong
Inner Mongolia Xinjiang
Hubei Shanxi Ningxia Henan
Hunan Shannxi
Qinghai
Sichuan Jiangxi Anhui Yunnan
Guangxi
Gansu
Hebei
8.5
8
Hainan Guizhou
4.4
4.45
4.5 4.55 ln(real effective exchange rate) lyk
4.6
4.4
Fitted values
4.45 4.5 ln(real effective exchange rate) lyk
Fitted values
NB. A rise means the appreciation of renminbi and a fall is the depreciation. Sources. China Statistical Yearbook, IMF International Financial Statistics, and Khor (1993).
43
4.55
Figure 6. Evolution of real GDP per-capita in coastal and inland provinces and their ratio
35000
3
30000
2,5
25000
20000 1,5 15000 1 10000 0,5
5000
coastal provinces
inland provinces
44
coastal/inland
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0 1988
0 1987
(yueans, 2000)
2
Table 1: Nominal and real effective exchange rates, inflation and economic growth in the provinces (annual average rate of variations, %) 1987-1993
1994-2009
Nominal effective exchange rate
Real effective exchange rate
Consumer price Real GDP index per-capita
Nominal effective exchange rate*
Real effective exchange Consumer Real GDP price index per-capita rate*
Beijing Tianjing Hebei Liaoning Shanghai Jiangsu Zhejiang Fujian Shandong Guangdong Hainan Coastal (simple average)
-8.11 -9.96 -10.23 -10.67 -10.29 -10.53 -4.89 -8.91 -10.58 -9.42 -7.05
-2.81 -4.44 -6.43 -4.79 -2.85 -4.74 -4.77 -4.59 -3.20 -4.81 -5.13
12.73 10.98 9.07 10.61 12.46 10.67 10.54 10.18 10.16 11.07 13.65
7.53 5.20 8.65 6.49 7.09 9.98 9.78 11.24 9.46 13.17 13.22
2.35 0.96 0.78 1.00 0.86 0.77 0.98 0.75 0.93 0.64 0.93
2.32 1.60 1.40 1.97 2.27 1.88 1.57 1.73 2.07 1.14 1.42
3.13 2.38 2.29 2.30 2.79 2.49 2.45 2.25 2.55 1.76 1.67
7.55 11.02 10.63 9.95 8.57 11.89 11.15 10.79 11.75 9.65 7.77
-9.15
-4.41
11.10
9.26
1.02
1.77
2.37
10.07
Shanxi Inner Mongolia Jilin Heilongjiang Anhui Jiangxi Henan Hubei Hunan Guangxi Sichuan Guizhou Yunnan Shannxi Gansu Qinghai Ningxia Xinjiang Inland (simple average)
-8.83 -8.01 -10.03 -10.32 -9.93 -7.83 -9.73 -9.78 -9.03 -1.06 -6.02 -6.97 -5.63 -6.91 -9.69 -10.12 -8.96 -9.47
-5.04 -5.48 -5.31 -5.34 -6.77 -5.66 -4.11 -5.05 -2.88 -3.45 -4.49 -6.91 -4.96 -4.87 -4.71 -3.64 -5.41 -3.06
10.43 12.49 10.80 10.83 10.63 9.63 8.57 10.67 11.20 10.46 10.50 10.04 10.62 10.21 10.17 10.75 11.02 10.48
5.40 6.50 6.45 5.86 4.33 7.31 7.40 5.96 5.89 7.90 7.61 5.51 7.87 7.55 6.95 3.62 5.16 8.26
1.93 1.58 1.66 1.67 1.34 3.62 0.82 1.29 1.54 1.04 2.39 1.65 1.37 3.14 1.38 1.22 1.00 1.02
1.94 2.54 1.96 2.17 1.98 2.12 1.94 1.73 2.49 1.37 2.73 2.46 -0.94 1.63 2.72 2.99 1.96 2.30
2.77 2.86 2.41 2.13 2.57 2.40 2.65 2.73 3.16 2.26 3.17 3.04 3.07 2.66 3.04 3.58 2.78 2.70
10.55 14.07 10.29 9.37 10.59 9.92 10.95 10.70 10.42 9.95 10.88 9.10 8.31 9.17 9.74 9.42 8.93 7.33
-8.24
-4.84
10.53
6.42
1.65
2.01
2.78
9.98
Province
Note: * for 1994-2008 period. Source: China Statistical Yearbooks.
.
45
Table 2: Expected impacts of real exchange rate increase (or appreciation) on economic growth Impact of exchange rate on intermediary variables (a)
Indirect impacts via transmission channels
size of tradable sector
production factors
− → − → − → + → + → − →
FDI ratio
+ → + → + →
SOE ratio
− →
export ratio Industry share
capital Intensity employment
+ →
Direct impacts
Impact of intermediary variables on growth (b)
+ → + → + →
education Via « work effort » of workers and managers
Total impact of real exchange rate
Impact of exchange rate on economic growth (c)=(a)*(b)
− → − → − → − → + →
− → + →
+ →
→ ?
46
Table 3: Direct and indirect effects of real exchange rate on economic growth Effects categories
Coefficients according to equations 1 to 8
Direct effects In inland provinces
a1
0.08
In coastal provinces
a1+ a11
0.00
via capital intensity
a2b1
0.02
via employment ratio
a3c1
-0.02
via education
a4d1
0.03
via exports/GDP
a5e1
-0.09
via industrial production share
a6f1
-0.002
via FDI/GFCF
a7g1
-0.02
via SOE’s investment ratio
a8h1
-0.07
In coastal provinces
a1 + a11 + a2b1 + a3c1 + a4 d1 + a5e1 + a6 f1 + a7 g1 + a8 h1
-0.16
In inland provinces
a1 + a2b1 + a3c1 + a4 d1 + a5e1 + a6 f1 + a7 g1 + a8 h1
-0.08
Indirect effects in all provinces
Total effects
47
Table 4. Means, standard deviation and Levin-Lin-Chu stationarity Test of variables Mean
Standard
Panel t-
deviation
statistics
Pvalue
Real GDP per capita in yuans 2000
8079.16
7709.34
-9.655
0.00
Real exchange rate index 2000
100.70
31.01
-8.089
0.00
Capital intensity in yuans 2000
29159
37476
-8.002
0.00
Employment/population (%)
50.03
5.80
-6.135
0.05
Education (%)
37.92
11.51
-8.998
0.01
Export ratio (%)
12.38
15.31
-7.483
0.00
Share of industrial production (%)
38.20
10.02
-7.123
0.04
FDI/GFCF (%)
6.29
8.65
-10.31
0.00
SOEs’ investment ratio (%)
58.05
17.81
-6.573
0.05
48
Table 5. Effects of real exchange rate on economic growth: 1987-2008 1
2
Per capita real GDP lagged one period
Real exchange rate lagged one period
3
4
5
0.66***
0.66***
0.66***
(8.81)
(8.78)
(8.78)
-1.63**
-1.04**
-0.02
0.08*
-0.03**
(2.12)
(-2.45)
(-1.03)
(1.80)
(-2.46)
Real exchange rate lagged one period *
-0.21*
-0.08**
-0.08**
coastal provinces
(1.99)
(-2.12)
(-2.12)
Coastal provinces
0.81***
1.79***
0.02
0.88**
0.88**
(6.24)
(3.66)
(0.48)
(2.00)
(2.00)
0.15**
0.13**
0.13**
(2.86)
(2.47)
(2.47)
0.17*
0.20**
0.20**
(1.96)
(2.04)
(2.04)
0.29***
0.34***
0.34***
(4.47)
(4.70)
(4.70)
0.05**
0.07***
0.07***
(2.76)
(4.67)
(4.67)
Industrial production share lagged one
0.04
0.04*
0.04*
period
(1.10)
(1.95)
(1.95)
FDI/GFCF lagged one period
0.01*
0.01*
0.01*
(2.08)
(1.78)
(1.78)
Capital intensity lagged one period
Employee/population lagged one period
Education lagged one period
Exports/GDP lagged one period
SOEs’ investment ratio
-0.08*** -0.09*** -0.09*** (-3.88)
(-3.66)
(-3.66)
Number of observations
654
654
654
654
654
Arellano-Bond test for AR(2)
0.43
0.32
0.64
0.35
0.35
Hansen test of overid. Restrictions:
0.20
0.24
0.56
0.61
0.61
Notes. - t-statistics corrected for heteroskedasticity by the while procedure are reported in parentheses. -*, ** and *** indicate significance at the 10%, 5% and 1% levels of confidence, respectively.
49
Table 6: Estimation of the channelling variables of the real exchange rate to economic growth: 1987-2008 1
2
3
4
5
6
7
Capital intensity
Employment/
Education
Export ratio
Industrial
FDI ratio
SOEs’
Population
production share
investment ratio
Real exchange rate
0.15***
-0.11***
0.08***
-1.27***
-0.05*
-2.36***
0.75***
(4.62)
(-7.24)
(5.15)
(-11.4)
(-2.01)
(-13.1)
(3.57)
0.59***
0.07*
0.22**
1.48***
0.29***
1.94***
-0.32*
(3.11)
(1.98)
(2.58)
(7.60)
(3.30)
(7.10)
(-1.76)
0.10***
0.002
0.04***
0.04***
0.004*
0.12***
-0.02***
(28.3)
(1.19)
(7.50)
(7.50)
(1.72)
(9.72)
(-6.20)
of 654
654
654
654
654
654
654
test 0.32
0.54
0.87
0.13
0.74
0.94
0.59
of 0.14
0.11
0.97
0.09
0.97
0.96
0.78
Costal provinces
Trend
Number observations Arellano-Bond for AR(2) Hansen
test
overid. Restrictions Notes. - t-statistics corrected for heteroskedasticity by the while procedure are reported in parentheses. -*, ** and *** indicate significance at the 10%, 5% and 1% levels of confidence, respectively.
50
Annex 1: Definitions and sources of variables
Names of variables
Calculation method
Source
Per capita real GDP
Real GDP expressed in 2000 constant prices divided by China Statistical Yearbooks, total population
several editions.
Real effective
Ratio of consumer price index (2000=100) of province to -
IMF,
exchange rate
the average consumer price index of its fifteen foreign Financial Statistics
International
trade partners, converted into the same currency. The -IMF, Direction of Trade renminbi-dollar exchange rate is calculated for the 1986- - Khor, 1993 1993 period as a weighted average of official rate and swap - China Statistical Yearbook, rate, taking part of imports financed by swap exchange several editions market for weighting.
- China Customs Statistics
Share of industrial
Ratio of industry in secondary sector except for China Statistical Yearbook,
production
construction to GDP
Capital intensity
Capital stock divided by employed population. The - Historical Data on China’s
several editions
inventory permanent method is used to calculate the capital Gross Domestic Production stock. The real gross fixed capital formation is deflated by Accounts (Zhongguo Guorei two series of prices (100=2000), successively available: the ShengShang Zongzhi “price index of gross fixed capital formation,” and the Hesuan Lishi Ziliao) “price index of investment in fixed assets” available since -China Statistical Yearbook, 1992. The first series is used for the period from 1972 to several editions 1992 and the second for the following years. Employment share
Number of employment divided by total population
China Statistical Yearbook, several editions
Investment ratio of
Investments in fixed assets of state-owned enterprises China Statistical Yearbook,
state-owned
divided by total investment
several editions
Exports divided by GDP
China Statistical Yearbook
enterprises Export ratio
several editions IDE ratio
Foreign direct investments divided by gross formation of China Statistical Yearbook fixed capital
Education
several editions
Number of persons having received at least secondary China Statistical Yearbook education divided by total population
51
several editions
