An empirical study of the foreign trade balance in China

The objective of this letter is to investigate the dynamic relationship between China's trade balance (T) and macroeconomic variables: domestic and foreign output (Y and Y*), real exchange rate (E), domestic and foreign money supply (M and M*). The ADF unit root results show that the variables are all integrated of order I(1). The trade balance in China is not cointegrated with a number of variables, including the exchange rate. Absorption, elasticity, and monetary models are compared, and the elastic model performs better. There has been J-curve in China, and the devaluations have had significant effect on the trade balance.