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

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...

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Bibliographic Details
Published inThe Journal of Asian finance, economics, and business Vol. 8; no. 11; pp. 47 - 66
Main Authors BAO, Ho Hoang Gia, LE, Hoang Phong
Format Journal Article
LanguageKorean
Published 한국유통과학회 30.11.2021
Korea Distribution Science Association
Subjects
EU
Vehicle Currency
China
UK
Exchange Rate
J-curve
NARDL
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Summary: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.
Bibliography:KISTI1.1003/JNL.JAKO202130254049999
ISSN:2288-4637
2288-4645