Processing Trade Regime as a Means of Hedging Against the Risks of Currency Appreciation

Jie Li, is an Associate Professor at Chinese Academy of Finance and Development, Central University of Finance and Economics (CUFE), Beijing. He is also director of CUFE Research Center for Foreign Reserves. He holds Master degree of Mathematics and PhD of Economics from Claremont Graduate University. His research interests include international money and finance, currency crises, foreign reserves management and exchange rate regimes. He has been publishing research articles in journals like Journal of International Money and Finance, Economic Modelling, among others. 

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We use firm-level data for the universe of Chinese exporters to document that trade share of processing trade relative to ordinary trade is significantly and positively associated with firm's real effective exchange rates (REER) appreciation. This connection is more profound for foreign owned exporters, compared to state owned and private ones. It seems that Chinese exporters utilize processing trade regime to hedge against the risks of domestic currency appreciation. This hedging behavior displays no seemingly regional difference among the exporters in eastern, middle and western regions of China.