Friday, 2 December 2011

The Renminbi and Poor-Country Growth

China’s current account surplus over the recent two decades can be well explained by structural savings determinants.  Song, Storesletten and Zilibotti (2010)[1] have have stressed the role of rising corporate savings due to reallocation within the manufacturing sector from low- to high-productivity companies. Wei (2010)[2] explains rising China’s household savings with gender-imbalances. Still, large appreciations do impact the current account and - in developing countries -  do depress growth (Keppler, Reisen, Schularick and Turkisch, 2011)[3], as evidenced by data over the past fifty years.

Renminbi effective exchange rate index, 2008 - 2011
Source: BIS

The graph documents the appreciation of the renminbi (RMB) in nominal (red dashed line) and real (blue solid line) effective exchange rate (REER) based on broad BIS effective exchange rate indices, comprising trade weights with 58 economies. Mostly due to positive inflation differentials with its trade partners, China’s currency has appreciated by 18 percent compared with its trade partners[4]  since 2008.  

What does the recent RMB appreciation mean for low- and middle-income countries countries? That, indeed, is a question rarely raised, and opinions rather than hard evidence have been provided. Subramanian (2010)[5] seems to envisage a static world economy where “higher tradable goods production in China results in lower traded goods production elsewhere in the developing world, entailing a growth cost for these countries”. While China’s undervaluation has boosted its long-run growth rate (by more than 2 per cent, according to Rodrik, 2008[6]) by allowing greater output of tradable goods, Subramanian juxtaposes the other poor countries as “emerging market victims” of China’s exchange rate policy. Rodrik (2010)[7] agrees: “China’s currency policies not only undercut the competitiveness of African and other poor regions’ industries; they also undermine those regions’ fundamental growth engines. What poor nations get out of Chinese mercantilism is, at best, temporary growth of the wrong kind.” Rodrik is concerned that countries in Sub-Saharan Africa, in particular, have been propelled forward merely by the growing demand for their natural resources from other countries – especially from China.

So is the recent RMB appreciation good news for other poor countries?   Now, with the RMB having gained in real effective terms by more than a quarter since mid 2005 (see graph), poor countries’ exports surely have become more competitive, which should speed growth if Subramanian and Rodrik are correct. “The Renminbi and Poor-country Growth”, a new publication[8], suggests the contrary – provided RMB appreciation will produce a slowdown in China’s growth as predicted by Kappler et al (2011) for the group of developing countries.

To analyse the impact of China’s growth (slowdown) on a broad group of poor  countries, the paper looks  at the relationship between China’s growth rate and those of 115 developing and emerging countries for the period between 1990 and 2009. The analysis distinguishes net oil and raw material exporters from net importers, and low- income from middle-income developing countries. The impact of China’s growth on these four country groups can be quantified using a fixed-effects model, which allows to analyse a cross-section of developing countries over time.

Some results of the series of panel regressions  deserve to be noted, including by politicians:

1.       The impact of China’s growth on both the low- and middle-income countries has grown significantly in the 2000s. The results show that a one per cent change in China’s growth rates will result in a change around 0.34 per cent in the same direction in the low-income countries. As for the middle-income countries, the corresponding growth association is 0.66 per cent.
2.       Similar to Levy Yeyati (2009)[9], the impact of OECD countries is found to have significantly decreased over the same period for the low-income countries with a coefficient close to zero (0.03 per cent to be precise). As for the middle-income countries though, there has not been a significant decrease in the impact of OECD growth in the 2000s.
3.       The results of the export-based analysis show that the China impact is not limited to exporters of oil and raw materials. On the contrary, the increasing growth association with China in the 2000s is a robust finding that pertains to non-oil developing countries. Consequently, China’s strengthening growth engine role for poor countries is not merely driven by the its demand for oil and other raw materials. This finding is supported by growing evidence of the remarkable rise of manufactured exports from Sub-Saharan Africa to China and other emerging countries and by foreign direct investment from emerging countries that has reached Africa’s non-oil countries (in proportion to their respective GDP) not less than it reached oil and raw material producers; by contrast, OECD-country imports from Africa remains as biased towards oil as the FDI flows from OECD to Africa.[10].

The trade patterns of growing countries tend to be quite dynamic. If factors are being accumulated at differential rates, the composition of output can change quite quickly. Rybczynski effects suggest that China’s skill-intensive output is rising disproportionately. Unlike low-income countries that do not compete directly with China anymore, advanced and middle-income manufacturing exporters compete directly with China in manufacturing exports. As a result, they are likely to gain the most from RMB revaluation. China’s average export prices (unit values) place substantial downward pressure on these countries’ prices; by contrast, there is little and melting evidence for price competition between China and low-income countries[11]. Table 3 summarises the discussion and the potential growth impact of renminbi for low- and middle-income countries[12].

The potential growth impact of renminbi appreciation on developing countries
Impact channel
Growth effect
Price effect
Total effect
Country group

Low-income, oil & non-oil
Middle-income, oil & non-oil
Source: See discussion in text based on own estimates; Rodrik (2008); Levy-Yeyati (2009) and Fu et al. (2010).

Considering the evidence on the lack of export competition between China and poor countries and their dependence on China’s growth for their own growth performance, the growth impact for poor countries of a sudden and perhaps ‘excessive’ renminbi appreciation would be likely to be negative. The growth impact on middle-income countries would be ambiguous, as the negative engine effect of a slowdown in China’s growth might be compensated through increased competitiveness that resource-poor middle-income countries would enjoy as a result of an appreciated renminbi. By extension, therefore, not just China but likewise other poor countries – in particular those which now have a low index of export similarity with China – have a vested interest in China’s exchange rate to remain conducive to growth.

If China continues to converge towards advance-country per capita income levels, either higher real wages or real appreciation of the Chinese currency will continue to speed China’s structural upgrading. This would further soften the price pressures on low-skilled goods and on low-income countries. At the same time, technological upgrading in China would move China’s price impact from the middle-income countries to the high-income economies. Prosperity in China and other large emerging countries will improve export opportunities for the remaining developing countries, which can lead to accelerating global growth, supported by a demographic transition with a drop in fertility and young age dependence[13]. China’s initial opening may have hurt some developing countries in the 1990s, but its sustained growth improves the long-term prospects of low-income developing countries.

[1] Song, Z., Storesletten, K., and F. Zilibotti (2010), The “Real” Causes of China’s Trade Surplus,, 2 May.
[2] Wei, S-J (2010), The Mystery of China’s Savings,, 6 February.
[3] Kappler, M, H. Reisen, M. Schularick and E. Turkisch (2011), The Macroeconomic Effects of Large Currency Appreciations, OECD Development Centre Working Papers No. 296.
[4] In an earlier VoxEu article, I had estimated the renminbi to be undervalued by 12 percent relative to the Balassa-Samuelson benchmark that allows for differences in per capita incomes;  Reisen, H. (2009), How to assess the renminbi’s undervaluation,, 17 December.
[5] Subramanian, A. (2010), It is the poor who pay for the weak renminbi, , Financial Times, 3 February.
[6] Rodrik, D (2008), “The Real Exchange Rate and Economic Growth”, Brookings Papers on Economic Activity, Vol. 2.
[8] Garroway, C., Hacibedel, B., Reisen, H. and E. Turkisch (2011), “The Renminbi and Poor-country Growth”, The World Economy, Vol 34, Issue 11, November
[9] Levy Yeyati, E. (2009), On emerging markets decoupling and growth convergence,, 7 November.
[10] For detailed evidence,  see the African Economic Outlook 2011,
[11] Fu, X, Kaplinsky, R., and J. Zhang (2010), “The Impact of China’s Exports on Global Manufactures Prices”, Universty of Oxford. SLPTMD Working Paper 32.
[12] This is obviously a very broad summary of likely effects which does not do justice to country situations. For example, the net growth effect for resource-rich middle-income countries is likely to resemble the negative impact that a real effective appreciation of the renminbi would have on lowincome countries. However, the empirical evidence presented in the literature reviewed does not allow further country disaggregation.
[13] See Chamon and M., Kremer, M. (2009),  Economic transformation, population growth and the long-run world income distribution, Journal of International Economics, Vol79.1., September.