Persistent Imbalances : The Impact of Exchange Rate Appreciation on China's Trade Balances

China's trade surplus is often heavily criticized in political and economic debates, accompanied by claims for a revaluation of the Chinese currency, the Renminbi (RMB). While the main arguments exchanged in the current discourse appear to become more and more emotionally loaded rather than driven by empirical insights, the academic literature, so far, has failed to deliver comprehensive studies to further the discussion. This paper sets out to revive an empirically guided debate by investigating bilateral trade balances between China and 11 of her main trading partners. Being the first to use structural restrictions based on trade theory, we entertain a vector error correction model with subsequent impulse response analyses and variance decompositions. We find a negative reaction of the trade balance when the Chinese RMB appreciates for most of China's Asian trading partners. For the Western trading partners, including the USA, however, there seems to be no empirical support for an exchange rate effect on Chinese exports