Is Currency Appreciation to Blame for China’s Slowdown?

Tuesday, October 20, 2015
china economy yuan appreciation
Thinkstock/selensergen

If China’s economy is highly dependent on exports, as many believe, keeping the value of its currency low is important for the country’s economic growth. A recent Economic Synopses essay by Economist Paulina Restrepo-Echavarria examines the relationship between China’s economic slowdown and its currency appreciation.

Over the past few years, the yuan (CNY) has gained value against most currencies. As the author pointed out, in trade-weighted terms, the CNY is at an all-time high. Such a move by the currency makes Chinese exports more expensive, which hurts the country’s competitiveness in world markets. Restrepo-Echavarria noted: “If this change in prices translates to a decrease in exports and a sufficiently high fraction of China’s gross domestic product (GDP) growth depends on the growth of exports, then the currency appreciation can translate to an economic slowdown.”

She evaluated this hypothesis by looking at two decompositions:

  • China’s GDP into all its main components
  • China’s GDP growth into the growth rate of all its components

Regarding the first decomposition, exports accounted for at most 35 percent of China’s GDP in 2006, and their importance has decreased over the years, especially compared with investment and private consumption. Regarding the second, the contribution of net exports to GDP growth has oscillated during China’s slowdown, which started in 2010. (Figures showing these statistics are available in the Economic Synopses essay, “China’s Slowdown: Is Currency Appreciation to Blame?”)

Restrepo-Echavarria noted that two facts suggest that the exchange rate appreciation is not to blame for China’s slowdown:

  • Investment and consumption seem to be much larger drivers of China’s GDP growth than exports.
  • The contribution of the growth rate of net exports has not shown a systematic decline since the start of the slowdown.

She concluded: “At least this is the case when one thinks about the simplest direct channel through which a currency exchange rate can affect growth: A currency appreciation makes exports more expensive, exports shrink by a large amount; and if they constitute a large share of GDP, then GDP growth will suffer.”

Additional Resources

Posted In Output  |  Tagged paulina restrepo-echavarriachinaexchange rateexportsyuan
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.

Subscribe to
On the Economy

Get notified when new content is available on our On the Economy blog.

Email Alerts  |  RSS

About the Blog

The St. Louis Fed On the Economy blog features relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts.


Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

Contact Us

For media-related questions, email mediainquiries@stls.frb.org. For all other blog-related questions or comments, email on-the-economy@stls.frb.org.

Categories