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Does China’s International Competitiveness Fluctuate in Consistency with PPP Equilibrium?

Macroeconomic Analysis and International Finance

ISBN: 978-1-78350-755-9, eISBN: 978-1-78350-756-6

Publication date: 26 April 2014



The aim of this study is to examine whether China’s exchange rate follows an equilibrium process and consequently to answer the question of whether or not China’s international competitiveness fluctuates in consistency with equilibrium.


The theoretical background of the paper relies on the Purchasing Power Parity (PPP) hypothesis, while the econometric methodology is mainly based on a nonlinear two-regime Threshold Autoregressive (TAR) unit root test.


The main finding is that China’s price competitiveness was not constantly following a disequilibrium process. The two-regime threshold model shows that PPP equilibrium was confirmed in periods of relatively high – compared to the estimated threshold – rate of real yuan appreciation. Moreover, it is implied that the fixed exchange rate regime cannot ensure external balance since it can neither establish equilibrium in the foreign exchange market, nor confirm that China’s international competitiveness adjustment follows an equilibrium process.

Practical implications

The results do not imply that China acts as a currency manipulator. However, a main policy implication of the paper is that China should continue appreciating the yuan to establish external balance.


This paper is the first which accounts for a nonlinear two-regime process toward a threshold, which is defined to be the rate of change in China’s international competitiveness. Consequently, the paper draws attention to the role of China’s international competiveness in accepting the PPP hypothesis.




An earlier version of this paper was presented at the 17th International Conference on Macroeconomic Analysis and International Finance, University of Crete, Rethymno, May 30–June 1, 2013 and the 10th Annual Conference of the Hellenic Finance and Accounting Association, University of Piraeus, December 16–17, 2011 and thanks are due to seminar participants for many helpful comments and discussions. Kouretas acknowledges financial support from a Marie Curie Transfer of Knowledge Fellowship of the European Community’s Sixth Framework Programme under contract number MTKD-CT-014288, from the Research Committee of the University of Crete under research grant #2257, as well as from the Research Committee of Athens University and Business under research grant EP-1836-01/00-01. We would like to thank without implicating Joscha Beckmann, Harris Dellas, Jerry Dwyer, Bill Gavin, Dimitris Georgoutsos, Bob King, Evgenia Passari, Jean-Sebastien Pentecote, and George Tavlas for valuable comments on an earlier draft.


Giannellis, N. and Kouretas, G.P. (2014), "Does China’s International Competitiveness Fluctuate in Consistency with PPP Equilibrium?", Macroeconomic Analysis and International Finance (International Symposia in Economic Theory and Econometrics, Vol. 23), Emerald Group Publishing Limited, Leeds, pp. 153-183.



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