The past three decades has witnessed a dramatic development of China’s exports. Now, China is one of the largest and most important players in international trade while thirty years ago, it was one of the poorest countries in the world with barely few trade connections with the rest of the world. Joining the World Trade Organization greatly deepened China’s integration to the international market and China successfully grasped the opportunity and made a great leap in the development of its exports. Both the value and the structure of China’s exports have changed dramatically since China joined WTO.
Though China has made great achievements in its exports, it is criticized by many developed economies such as the U.S. and the EU that many of the achievements were made through manipulating the exchange rate which helped to keep the RMB undervalued. These critics started a hot debate about the RMB exchange rate.
One of the key focuses in the debate is how large the shock brought by the change of exchange rate will be and the best way to gauge it is to estimate the export exchange rate elasticity. Many researchers have studied China’s export exchange elasticity at the aggregate level, however, the structure of China’s exports have changed dramatically and any research which neglected this dramatic structural change may finally result in misleading conclusions. To grasp the dramatic structural change of China’s export, this paper classified China’s manufactured exports into capital and technology intensive products and labor intensive products. By decomposing the export exchange rate elasticity into export price elasticity and exchange rate pass through and using the ARDL method for co-integration, this paper estimated China’s export exchange rate elasticity of both capital and technology intensive products and labor intensive products. The empirical analysis found that the export exchange rate elasticity is much smaller for capital and technology intensive products and the difference mainly came from the difference in export price elasticity while the exchange rate pass through for both of the groups were close.