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 1980-92 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.