The Impact of Exchange Rate Fluctuations on the Trade of China: Evidence from a Dynamic Simulated ARDL

This paper examines how the exchange rate volatility of the Renminbi (RMB), money supply, inflation, and interest rates affect the balance of trade in China based on time-series data throughout 1990 to 2022. Although most of the traditional macroeconomic determinants have been studied and reported, this study is a new input since it uses the ARDL bounds testing method as well as an advanced dynamic simulated ARDL model to identify the intricate long-run and short-run intercept. Order of variables are I(0) and I(1), confirmed by unit root testing, the Augmented Dickey-Fuller test, which explains the application of the ARDL framework. The results of the bounds test suggest that there is a long-term, co-integrating relationship between the variables. Empirical evidence indicates that volatility in the exchange rate in the RMB has a strong positive impact on the trade balance both in the short and long term. Inflation and interest rates, on the other hand, exhibit a very strong negative long-term influence. The findings indicate that although the RMB is comparatively a minor factor to the total trade variance, its volatility is an imperative instrument in ensuring a desirable trade position. The results of this study provide policy makers with important information to optimize the monetary policies on trade and dealing with currency changes in a way that would guarantee a stable economic balance. Through the dynamic simulated ARDL method, this study presents a very precise forecasting instrument in the quest to comprehend the changing role of China in international trade environment.