Discussion Paper

No. 2017-13 | March 24, 2017
Exchange rate movements and export market dynamics: evidence from China


This paper highlights the relationship between foreign exchange rate fluctuations and firms’ export market dynamics using a Chinese firm-level production data and a firm-level trade data over the period of 2000–2006. The author adopts a discrete-time survival model in his empirical investigation and further executes several extensions and robustness checks to the baseline results. The main results of the paper can be summarized as follows: First, an exchange rate appreciation increases the likelihood of export market exit, reduces the capability of export market survival and decreases the probability of export market entry. Second, high productivity firms are less likely to exit from export markets and more likely to enter and survive in export markets in the period of exchange rate appreciation. Third, exchange rate appreciation decreases the likelihood of export market entering and increases the likelihood of export market exiting more for private-owned firms, young firms and non-eastern firms. Finally, other sources of heterogeneity, such as extensive margins, import demand elasticity, different destinations, U.S. dollar peg, and the liberalization of trading rights also matter regarding the effect of exchange rate changes.

JEL Classification:

F14, F31, F32, F41


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Cite As

Xiaobing Huang (2017). Exchange rate movements and export market dynamics: evidence from China. Economics Discussion Papers, No 2017-13, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-13

Comments and Questions

Anonymous - Referee report 1
April 26, 2017 - 16:58

see attached file

Xiaobing Huang - Reply to referee 1
July 07, 2017 - 10:36

Reply to referee 1

Anonymous - Referee report 2
May 08, 2017 - 13:29

The paper assesses the effects of exchange rate movements on firm’s export market entry and exit. The results suggest that an exchange rate appreciation decreases the probability of entry and increases the probability of exit in line with the previous literature.
The direction of results is in line with earlier ...[more]

... research, however, the estimated effects are very large compared to the literature. I am not sure to what extent this is due to issues around specification and interpretation. Below are my concerns as well as suggestions for improvement:
- The 60% and 70% reductions/increases in hazard rates for entry/exit compare are large compared to the literature. Fitzgerald and Haller (2014) estimate a change in participation of less than 1% in response to a change in the exchange rate of 1%. The same is true for Berman, Martin and Mayer. This huge difference needs to be investigated and explained. Suggestions on how to do this are explained below:
o First, if as described in Section 3.2 a cloglog model is actually applied and the results in Tables 6 and 7 are not the results of running probit regression with an entry/exit dummy on the left hand side, the results need to be interpreted much more carefully. In particular, the size of the effects cannot necessarily be read directly from the coefficient estimates (reread Jenkins (2005) cited in footnote 5). Moreover, all the interaction effects and base effects of variables that have interaction effects included need to be evaluated at specific points.
o If indeed a hazard model is estimated, I am not following on how this works for entry. What is the hazard of entry?
o Could the strong effects be a consequence of the characteristics/composition of the merged sample?
o Another issue is measurement: to what extent is exit and entry driven by firms coming in and out of the panel/ markets as a result of them crossing the reporting threshold? Also the definition of entrants suggests that export spells where firms enter the export market/ a new export market for the first time are not covered by this analysis at all. Is this the case? If so, the interpretation needs to reflect this.
o In comparison to previous literature it is important to investigate how much of the difference is due to the different methodology used.
- Introduction:
o In parts this is a somewhat eclectic description of the literature. For example, is it not clear why the pass-through literature is relevant in this context or the discussion around the Marshall-Lerner condition (if this is indeed relevant an explanation of what this condition is should be included).
o The introduction could be greatly enhanced if the results found in the present paper were put into the context of the related literature and an effort was made to identify potential sources of differences.

Further comments:
- Table 1: Are the results figures presented in this table converted constant RMB? If so what is the base year?
- When describing the data, please explain how the cleaning and the merging affects coverage. I.e. after each step report what percentage of sales, employment and exports the resulting sample accounts for as a share of the initial data.
- Table 2: it is not clear whether this table captures only firms that exported in 2002 and all consecutive years or whether it also includes firms that are still in operation but no longer export. Regarding the column on the number of entering firms: is it the number of firms entering exporting or the number of newly established firms? Given that re-entry seems to be large part of the sample, it would be useful to quantify what fraction of export spells it accounts for.
- REER: what are the weights going into this based on?
- Construction of TFP: where does the 15% depreciation rate come from (or the 5 or 10%), i.e. provide motivation or a reference (value) for China? Where do the price indexes come from? At what level are they measured? Please provide summary statistics for the estimated TFP results (number of observations, R2). Are the TFP results estimated on the full sample or on the matched sample?
- General points on the tables:
o At what level are the industries defined?
o What do we learn from the results presented in column 1 of tables 6 and 7?
o Report percentages correctly predicted.
o Explain how 'Eastern China' is defined.
- It is not clear what is being done in Table 8, explain the specifications in more detail and be more precise in labelling the columns. In particular, it is not clear to me what we learn from the columns labelled import competition.
- The elasticities estimated in Table 10 are lower compared to the baseline results. Any explanation for this?
- Finally it would be interesting to see how much entry and exit matter in the aggregate.

Fitzgerald, D. & Haller, S. (2014), Exporters and Shocks: Dissecting the International Elasticity Puzzle, NBER Working Papers 19968, National Bureau of Economic Research.

Xiaobing Huang - Reply to referee 2
July 07, 2017 - 10:36

Reply to referee 2

Anonymous - the revised paper
July 07, 2017 - 11:10

the revised paper