China's Imports: An Empirical Analysis Using Johansen's Cointegration Approach


WP/94/145-EA
China's Imports: An Empirical Analysis Using Johansen's
Cointegration Approach by Mingwei Yuan and Kalpana Kochhar

A very important component of China's economic transformation, which
began in 1978, has been the process of opening up to the outside world.
Consequently, the role of external trade in China's economy has grown
dramatically in the last 15 years. The main feature of China's foreign
trade policy during this period has been an emphasis on the promotion of
exports to generate foreign exchange, coupled with a relatively restrictive
and managed import regime, although the trade system has been progressively
liberalized as part of the reform process. The focus of this paper is on
the behavior of imports--which is specified as functions of real economic
activity, relative prices, and foreign exchange reserves (the latter as a
proxy for the use of quantitative import controls)--during the l980-92
period. Specifically, the paper estimates the long-run and short-run
determinants of China's imports by applying Johansen's generalization of the
cointegration and error-correction approach to time series analysis.

The results show that imports depend positively on the level of foreign
exchange reserves and negatively on relative prices, both in the short and
long run. Also, the paper finds that long-run output elasticity of imports
is considerably smaller than in the short run, suggesting that some import
substitution has taken place over time. Parameter stability tests indicate
that the estimated parameters of the short-run relationship are stable over
the sample period. A comparison of the forecasting ability of the Johansen
error-correction model with a conventional partial adjustment model shows
that the former predicts the turning points with a greater degree of
accuracy than does the latter.