The impact of RMB real exchange on China’s trade balance——Evidence from asymmetric cointegration test

This paper examines the long run equilibrium relationship between RMB exchange rate and trade balance during January 1994 to April 2009. A feature of this paper is that it uses asymmetric co-integration technique to study subtle relationship between variables. Our main findings are as follows:Marshall-Lerner condition holds for China in long run;There is J curve effect in China;There is evidence for asymmetric co-integration between RMB exchange rate and trade balance. When China faces trade balance deficit,adjustment back to equilibrium is more rapid compared to the case of huge trade balance surplus. Therefore,relative to the trade surplus,currently,more attentions should be paid to the adverse impact of foreign trade on China's economy.