Real Exchange Rates and Manufacturing Industry in China

The Chinese real manufacturing value added increased at a higher growth rate (17% per year on average) during the strong depreciation period of the renminbi from 1984 to 1993 than that (10%) during the period of the strong appreciation from 1994 to 2016. On contrary, its productivity growth accelerated at an annual average rate of 9.7% during the real appreciation period relative to 3.6% during the real depreciation period. This paper originally argues that real appreciation of exchange rate may improve manufacturing productivity (rarely studied), mitigating its traditional negative effects; its total effect is thus uncertain; only an empirical investigation can reveal it. We propose a manufacturing value added function augmented of real exchange rate able to estimate these two kinds of effects. To this objective, we calculate three renminbi real exchange rates for the Chinese manufacturing at macro, product and sector levels. The obtained results confirm that the renminbi real appreciation exerted traditional negative effects on the size of tradable sector and employment, but positive effects on capital intensity, efficiency improvement of workers and staffs and competitiveness via Schumpeterian “creative destruction,” innovation and high technology industries. The positive effects on manufacturing value added are however still too small to offset the negative ones. These results suggest that China should gradually revalue the renminbi in function of manufacturing productivity improvement to avoid the serious deceleration of manufacturing industry when its negative impacts on the size of tradable sector, resource allocation to non-tradable sector and employment are superior to positive effects of productivity improvement.