LAUSR

In a departure from most studies, this paper examines in a multivariate context the influence of both the exchange rate and structural factors on China’s trade balance vis-à-vis selected partner countries. Structural change is proxied by the evolution of the labour skill composition of trade. The empirical findings indicate that China’s large trade surplus cannot be attributed to exchange rate policy alone. The large persistent trade surplus also reflects improvement in non-price competitiveness arising from the fact that China’s exports are rising up the skill ladder and imports are moving down the skill ladder.