A macro assessment of China effects on Malaysian exports and trade balances
| Pages | 18-37 |
| DOI | https://doi.org/10.1108/JCEFTS-11-2012-0019 |
| Date | 28 January 2014 |
| Published date | 28 January 2014 |
| Author | Tze-Haw Chan,Hooi Hooi Lean,Chee-Wooi Hooy |
| Subject Matter | Economics,International economics |
A macro assessment of China
effects on Malaysian exports
and trade balances
Tze-Haw Chan
Graduate School of Business, Universiti Sains Malaysia, Penang, Malaysia
Hooi Hooi Lean
School of Social Sciences, Universiti Sains Malaysia, Penang, Malaysia, and
Chee-Wooi Hooy
School of Management, Universiti Sains Malaysia, Penang, Malaysia
Abstract
Purpose – This paper aims to focus on the impact of China’s export expansion on Malaysian
monthly trading with to her 12 major trading partners over the liberalization era.
Design/methodology/approach – The analytical framework comprises of both the export and
trade balance models. Unit root and cointegration tests with break and error correction modeling are
employed in the analyses.
Findings – Regime shifts are evident in the long run where structural break(s) found mostly
coincides with the Asia crisis and China’s accession into WTO. While the income effects are more
apparent in most cases, the real exchanges are rather insignificant and incorrectly signed for
Malaysian bilateral trading. Besides, the trade balance estimation is generally more consistent that the
Chinese exports have exhibited complementary effects in the long-run, mainly for advanced export
destination such as Australia, Germany, Japan, the UK and the USA. On the whole, there is insufficient
evidence to support the “PRC competitive threat”.
Practical implications – The empirical evidence disfavors currency devaluation for current
account correction and reveals that the fear for China effect might be over-projected. Closer regional
collaboration and trade integration between the two nations are well expected.
Originality/value – The paper assesses the China’s crowding out effect and magnitudes of
Malaysian export and trade balance elasticities with model specifications that consider structural
breaks. The paper also assesses the macro dimension of income and real exchanges effects.
Keywords China effect, Malaysiantrading, Structural break
Paper type Research paper
1. Introduction
The economic boom in Malaysia from the early 1990s until the onset of the 1997 Asian
financial crisis was underpinned by rapid export growth to developed markets, mainly
the USA, Japan and the EU core members. The export-lead policy has been quite
successful and it has remained as growth impetus for Malaysia GDP in the recent
decades. However, the rising of People’s Republic of China (PRC) as the world factory
has raised a concern whether the export oriented growth policy will be sustainable. PRC
has consistently achieved double-digit growth rates over the last two decades. Likewise,
PRC’s export has targeted on developed markets especially the USA and the EU, which
is also among the main export destinations of Malaysia. Moreover, the export structure
of PRC is quite similar with Malaysia as the base export of both countries is on
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1754-4408.htm
Received 21 November 2012
Revised 1 August 2013
Accepted 7 September 2013
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 7 No. 1, 2014
pp. 18-37
qEmerald Group Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-11-2012-0019
JCEFTS
7,1
18
labor-intensive manufacturing products. The accession of PRC into WTO in 2001 has
further enhanced the magnitude of export flow from PRC to the developed markets.
Since then PRC has become the largest final assembly base before consumer goods are
exported to the developed nations. Most of the parts and components are shipped from
Southeast Asia (ASEAN) and most likely will shrink the direct exports of South east
countries, including Malaysia, to the developed nations. No doubt as a close neighbor of
PRC, Malaysia export performance is under pressure.
Table I provides some general statistics to support such argument. With the upward
trending of export value over GDP, one can tell that both PRC and Malaysia were getting
more reliance on exports. But unlike PRC that has experienced marvelous growth of
exports after the 1990s; Malaysian exports grow at slower pace since mid-199 0s. The
figures decelerated in some of the years after the 1997 Asian financial crisis and during
the 2008 Subprime crisis. In recent world export ranking, PRC has been topped globally,
while Malaysia is staying stagnant at the 20th position. Looking at Table II, both PRC
and Malaysia share highly similar destination of export flows, with slightly different in
the trade-partner ranking due to their dependency on the neighboring world level
entrepots, i.e. Hong Kong and Singapore. Both countries also export relatively more to
their neighboring countries, i.e. China to South Korea and Russia, while Malaysia to her
ASEAN counterparts; but generally both countries export are focus on the same
developed countries, i.e. the USA, Japan and the Western EU nations.
Following the economy liberalization and recent trade expansion of China, the
“PRC competitive threat” hypothesis has gained increasing attention among scholars.
A few studies that focus on non-neighboring countries, namely the Latin American and
Caribbean markets, have reported some significant PRC crowding-out effects (Quintin,
2004; Lall et al., 2005; Jenkins et al., 2006). Others, on the other hand, would suggest that
PRC export expansion has a complementary effect for its neighbors. Fernald et al. (1999),
for instance, reported that PRC export expansion as a result of Renmimbi devaluation in
1994 did not poses any crowding-out effect on NIEs (Korea, Singapore and Taiwan) and
ASEAN-four (Indonesia, Malaysia, Philippines, Thailand). Instead, PRC’s real export
growth was positively correlated with real export growth of those countries.
Eichengreen et al. (2007) employed panel regression of 13 Asian countries (including
Malaysia) with their 180 importing countries under an augmented gravity model also
reported a positive effect of PRC export expansion. On top of that, they did find some
extent of crowding-out effect when disaggregated data were used, mainly for
less developed Asian economies and in consumer goods market which is considered as
low-technology export; but not in markets for capital goods, which is considered as
high-technology export. Using a gravity approach, Greenaway et al. (2008) then
documented empirical evidence that PRC export over 1997-2003 displaced total export of
high income East Asia countries to third country, but for middle income East Asia
countries, including Malaysia, PRC export expansion was actually complementary.
Clearly, at present stage, the literature has not been conclusive about the
“PRC competitive threat” and further exploration is to be taken. This study takes a
different approach to investigate the issue pertaining to Malaysian bilateral trading with
her 12 major partners. First, we assess the impacts of PRC export expansion via two
models: the Malaysian export model and the Malaysian trade balance model, by having
China export as forcing variable. In other words, we examine if the China effect
homogeneous across countries or varies by the export intensity and trade balances
China effects
on Malaysian
exports
19
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