An empirical evaluation of export demand in China

Purpose – The purpose of this paper is to estimate the export demand equation for China with appropriate specification that incorporates exchange rate in the relative price variable. Design/methodology/approach – Alternative time series techniques such as general to specific and Johansen maximum likelihood are used with annual data from 1974‐2004. The augmented Dicky–Fuller and Elliot–Rothenberg–Stock methods are also employed to test the time series properties of the variables. Findings – The paper confirms that there is a cointegration relationship between real exports, real income and relative prices in China. The long‐run income elasticity is around 1.3 and the relative price elasticity is around −1.5. In addition, the export demand functions are temporally stable in China. Research limitations/implications – The structural breaks and trade shock analysis were ignored because that would have made this paper much longer. Practical implications – The results imply that exports are an engine of growth in China. China's exports are competitive in the international market and it has the option to devalue its currency to promote export earnings. However, the paper argues that in current global economic crises, trade promotion policies such as subsidies, tax exceptions and special credit lines should be encouraged. Originality/value – The paper assesses the magnitudes of export elasticities with a specification that includes exchange rate in relative price variable.