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School of Industrial Development, Nanjing University of Finance & Economics, Nanjing, China
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School of Business, Nanjing University, Nanjing, China
Keywords: This paper studies the influential relationship between Chinese opening up and economic growth
Trade openness quality in China under exchange rate fluctuation from 1994 to 2018. There is a long-term stable
Exchange rate fluctuation co-integration relationship between opening-up and the quality of economic growth. Trade
Economic growth quality openness can significantly promote the quality of economic growth in both the short and long
Regional heterogeneity
term. When the short-term fluctuation deviated from the long-term equilibrium, the quality of
Non-linear relationship
economic growth can remain stable through automatic adjustment. The positive impact of trade
openness on quality of economic growth had a significant regional heterogeneity and non-linear
threshold characteristics.
It is a relatively consistent view, regarding the relationship between trade openness and economic growth in the circle of foreign
economic theory, that trade openness can facilitate the promotion of economic growth quality. Neoclassical growth theory holds that
trade openness can promote capital formation and the enhancement of resource allocation efficiency, thus facilitating the im-
provement of economic growth quality (Helpman, 1985; Rodrik, 1988). New growth theory posits that trade openness mainly
elevates economic growth quality through accelerating technical progress and boosting factor productivity (Romer, 1986;
Robert, 1988). In recent years, scholars have been studying the relationship between trade openness and economic growth.
Idris (2016) has argued that trade openness was one of the main drivers of economic growth. Keho (2017) has suggested that trade
openness has a positive influence on economic growth in both the short and long term, and that there is a positive and powerful
complementary relationship between trade openness and capital formation in the promotion of economic growth.
Huchet‐Bourdon (2018) has stated that, in the long run, trade openness is conducive to economic growth.
Corresponding author.
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https://doi.org/10.1016/j.frl.2020.101488
Received 5 November 2019; Received in revised form 17 February 2020; Accepted 5 March 2020
1544-6123/ © 2020 Elsevier Inc. All rights reserved.
Please cite this article as: Qunxi Kong, et al., Finance Research Letters, https://doi.org/10.1016/j.frl.2020.101488
Q. Kong, et al. Finance Research Letters xxx (xxxx) xxxx
Meanwhile, existing studies suggest that developing countries can better utilize the existing knowledge storage of developed
countries through trade. For example, Abid (2019) and Mensi et al. (2019) have found that an increase in trade openness can
accelerate technical progress of advantaged industries, thus promoting the improvement of economic quality. Additionally, trade
openness significantly influences capital deepening and promotes economic growth quality by changing the structure of the labor
force. Wang et al. (2019) have contended that trade openness improves capacity utilization and output levels significantly by ex-
panding the market size, as well as significantly influencing capital deepening and driving economic growth by changing the
structure of the labor force. According to Zhang et al.(2019a), opening up to the outside world has had a significant positive impact
on China’s economic growth, while regional opening up has significantly hindered China’s rapid economic growth. Zhang and
Guo (2019) reported that there were significant non-linear characteristics between trade openness and growth in the Chinese
economy. The degree of trade openness had an asymmetric effect on economic growth. The promoting effect of trade openness on
economic growth decreased with the increase of the degree of openness, but the two were always positively correlated. According to
Wei et al. (2019) and Zhang et al (2019c), after 2008, the influence of trade openness on economic growth showed a downward trend.
The common feature of the above studies on the linear relationship between trade openness and the quality of economic growth is
that all assume that there is a long-term stable relationship between the two. Moreover, these studies did not consider the cyclical
factors of economic operation, and did not describe the mechanisms of the two factors in the short term. Therefore, this paper first
builds an ARDL (Autoregressive-distributed Lag) model based on a unified analytical framework to study the long-term relationship
between trade openness and the quality of economic growth under exchange rate fluctuations. Second, this paper establishes an error
correction model to describe the short-term relationship between the two. Finally, this study uses a threshold model to explore the
non-linear relationship between trade openness and the quality of economic growth.
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Table 1
Economic growth quality index system.
Dimensions Sub-index Basic indicators Proxy variables
Note: Theil index is used to measure the income gap between regions. i represents towns and villages respectively;Ztare the total population at
period t;Ptare the total income at period t.
where i stood for the observed individual, t for the time, trade openness (TOP) for the threshold variable, ϕfor the threshold value and
Xit for the set of independent variables. The control variables selected in this paper were industrial structure, resource endowment,
innovation level, human capital level and government financial expenditure (Yuan Qian and Wu Lihua, 2019; Zhang et al., 2020a;
James and Aadland, 2011).
Provincial-level China panel data during the period of 1994–2018 have been adopted as research samples for this study. Due to
the lack of some data from Tibet, 30 provinces (cities, regions) were ultimately chosen as the section samples. The variable data was
taken from China Statistical Yearbook, China Statistical Yearbook of Science and Technology, Statistical Bulletin of Chinese Foreign Direct
Investment, statistical yearbooks of each province and city, and the official database of the International Monetary Fund (IMF).
Relevant variables are defined as below:
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was conducted for each proxy variable. Then, dimensionality reduction treatment is carried out for each basic index through principal
component analysis. Finally, the comprehensive indexes of economic growth quality have been gained.
3. The long-term and short-term equilibrium between opening-up and quality of economic growth
In order to further study the correlation between opening up and the quality of economic growth, this paper chose two dimensions
of trade openness and foreign direct investment for specific research. Figs. 1 and 2 illustrate that both degree of trade openness and
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Table 2
Co-integration test results.
Null hypothesis Trace statistic 5% critical value 1% critical value
Table 3
The estimation results of the long-term and short-term model of ARDL.
Models Variables Coefficient Std. error T-test P-value
Note: (1) The subscript number in the variable represents the lag period, t-1 stands for lag phase 1 and t-2 stands for lag phase two. (2) ***,**, and *
indicate the level of significance of 1%, 5%, and 10%, respectively. (3) R̄ 2 = 0.9987 , DW=2.0543.
outward direct investment were positively correlated to quality of economic growth, but, in the context of exchange rate fluctuation,
if quality of economic growth, degree of trade openness, FDI and real exchange rate were incorporated into the same analytical
framework, the influence relationship between opening-up and quality of economic growth must be further tested.
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Table 4
Results of sub-regional regression.
Variables Nation East Mid West
2SLS GMM 2SLS GMM 2SLS GMM 2SLS GMM
1nECOt − 1 0.8915⁎⁎⁎ (6.55) 0.8648⁎⁎⁎(4.45) 0.8896⁎⁎⁎ (5.14) 0.7862⁎⁎⁎ (5.11) 0.5035⁎⁎⁎ (3.57) 0.6133⁎⁎ (3.45) 0.7886⁎⁎ (2.04) 0.7230⁎⁎ (2.88)
1nFDI −0.0026 (−0.52) 0.0056 (0.45) −0.0035⁎⁎ (−2.42) 0.0085 (1.34) 0.0019 (1.93) 0.0050 (0.68) 0.0024⁎⁎⁎ (2.87) 0.0031⁎⁎⁎ (2.76)
1nFDIt − 1 −0.0004 (−0.36) 0.0014 (0.64) 0.0005 (1.52) 0.0077 (0.63) 0.0007 (0.44) 0.0059 (0.87) −0.0001 (−0.69) −0.0004 (−0.32)
1nREER 1.6878⁎⁎⁎ (2.83) 1.9300⁎⁎⁎ (2.11) 4.5166⁎⁎⁎ (4.14) 5.3731⁎⁎⁎ (1.55) 2.3575 (1.94) 3.1709 (1.29) 0.8532⁎⁎⁎ (2.60) 0.9571⁎⁎⁎ (2.15)
1nREERt − 1 1.1450⁎⁎⁎ (2.74) 2.2930⁎⁎⁎ (1.57) 5.3594⁎⁎⁎ (2.42) 4.0900⁎⁎⁎ (4.46) 3.0819⁎⁎⁎ (2.19) 2.2930 (1.75) 1.4103 (0.24) 2.1587 (2.45)
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1nTOP 0.4736⁎⁎⁎ (2.39) 0.5511⁎⁎⁎ (2.51) 0.6710⁎⁎⁎ (4.14) 0.8981⁎⁎⁎ (2.86) −3.7469⁎⁎ (−1.24) −2.5964 (−1.03) 0.4736 (0.87) 0.5059 (0.70)
1nFDIt − 1 0.8807 (0.78) 0.6826 (0.12) −1.4736 (−0.56) −0.8384 (−0.88) 0.4103 (0.27) 0.5059 (0.79) 0.5989 (0.13) 0.6826 (0.62)
C 0.3335 (0.56) 0.4875 (0.36) 0.8782 (0.26) 0.5938 (0.52) 0.7821 (2.87) 0.9220 (1.48) 0.3992 (0.98) 0.2695 (0.75)
Wald test 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
AR(1) 0.4962 0.5054 0.6050 0.6926 0.7887 0.5051 0.8237 0.7171
AR(2) 0.6630 0.7037 0.0211 0.4848 0.7969 0.2134 0.9334 0.6099
N 403 403 170 170 112 112 121 121
Note: (1) The subscript number in the variable represents the lag period, t-1 stands for lag phase 1 and t-2 stands for lag phase two. (2) ***,**, and * indicate the level of significance of 1%, 5%, and 10%,
respectively. (3) AR (1) and AR (2) are Arellano and Bond (1991) tests for autocorrelation in differences.
Finance Research Letters xxx (xxxx) xxxx
Q. Kong, et al. Finance Research Letters xxx (xxxx) xxxx
Table 5
Results of threshold effects regression.
Variables Nation East Mid West
***,**
Note: , and * indicate the level of significance of 1%, 5%, and 10%, respectively.
Table 6
Sub-sample results with high, medium and low trade openness.
Variables Low trade openness Medium trade openness High trade openness
2SLS GMM 2SLS GMM 2SLS GMM
***,**
Note: , and * indicate the level of significance of 1%, 5%, and 10%, respectively.
Firstly, an NP unit root test was carried out on the stationarity of multiple variable sequences. The results showed that the
horizontal series of natural logarithmic sequences of the variables involved in this paper were all non-stationary series, but became
stationary series after first-order difference. Thus, I (1) was stationary and it was possible to estimate the ARDL model.
Secondly, this study performed a co-integration test on the relationship between four variables: ln ECOt, ln FDIt, ln TOPt and
ln REERt using the Johansen test. The test results (Table 2) indicated that at the significant levels of 5% and 1%, there was a unique
co-integration relationship among ln ECOt, ln FDIt, ln TOPt and ln REERt.
Before estimating the long-term coefficient, it was necessary to determine the lag order of the model. According to the actual
statistics of sample data, the optimal lag order of each variable in the model was identified using Schwarz-Bayes Criterion (SBC).
Considering the length of sample data, in this paper, the maximum lag order of each variable was limited to 2, and finally ARDL
(1,2,2,2) was identified to be the most appropriate. The estimation results are shown in Table 3.
As Table 3 illustrates, the degree of trade openness grew by 1% and the quality of economic growth grew by about 70–80%,
indicating which meant that the degree of trade openness can promote the quality of economic growth in both long and short terms.
Moreover, the adjustment coefficient of the error correction terms was −0.3265, indicating that when the short-term fluctuation
deviated from the long-term equilibrium, it could be pulled back to equilibrium with an adjustment intensity of 0.3265 and that
economic growth tended to be self-stabilizing.
Based on the above discussions, it clear that the studied variabls influenced each other in the long run. However, the quality of
economic growth in the current period was not only influenced by the degree of trade openness and other factors in the current
period, but also by the economic development level in the local area. In addition, since the data in this paper belongs to a short panel,
Diff-GMM has been adopted for the unbiasedness of sample statistics. In this section, samples were divided into three regions: eastern,
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Table 7
Sample spatial distribution of different trade openness.
Threshold variable 1994 2002 2010 2018
Low trade openness Anhui, Jiangxi, Hunan, Guangxi, Hainan, Jiangxi, Hunan, Guangxi, Hainan, Sichuan, Jiangxi, Hunan, Guangxi, Hainan, Sichuan, Jiangxi, Guangxi, Hainan, Guizhou, Yunnan,
Sichuan, Guizhou, Yunnan, Gansu, Qinghai, Guizhou, Yunnan, Gansu, Qinghai, Hubei, Guizhou, Yunnan, Gansu, Qinghai, Hubei, Gansu, Qinghai, Hubei, Xinjiang,
Hubei, Xinjiang, Heilongjiang, Inner Mongolia Xinjiang, Heilongjiang, Inner Mongolia Xinjiang, Heilongjiang, Inner Mongolia Heilongjiang, Inner Mongolia
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Medium trade Hebei, Shanxi, Jilin, Jiangsu, Zhejiang, Hebei, Shanxi, Jilin, Jiangsu, Zhejiang, Hebei, Shanxi, Jilin, Shandong, Henan, Hebei, Shanxi, Jilin, Shandong, Henan,
openness Shandong, Henan, Guangdong, Shaanxi, Ningxia, Shandong, Henan, Guangdong, Shaanxi, Guangdong, Shaanxi, Ningxia, Liaoning, Fujian, Guangdong, Shaanxi, Ningxia, Liaoning,
Liaoning, Fujian, Chongqing, Tianjin Ningxia, Liaoning, Fujian, Anhui Anhui Fujian, Anhui, Sichuan, Hunan
High trade openness Beijing, Shanghai Beijing, Shanghai, Chongqing, Tianjin Beijing, Shanghai, Chongqing, Tianjin, Beijing, Shanghai, Chongqing, Tianjin,
Zhejiang, Jiangsu Zhejiang, Jiangsu
central and western2, to carry out a regional analysis. 2SLS and GMM methods were used to test and the results are shown in Table 4.
The results indicate that trade openness had a significant positive influence on the quality of economic growth in the eastern
region, but that this positive influence was not obvious in the central and western regions. One possible reason for this discrepancy is
that the coastal and eastern regions have well-established infrastructure and abundant physical resources and human resources,
which can offer a favorable external environment for trading, meaning that opening-up was mainly concentrated in the coastal and
eastern region and had a significant promotional effect on the quality of economic growth and formation of materials and capital in
these regions.
In accordance with Tables 5 and 6, the relationship between trade openness and economic growth quality presents an “N-type”
characteristic trend on the whole, except for the central area (Xu Yingzhi and Guo Jin et al., 2014; Xu Jing and Meng Juan, 2015;
Zhang et al., 2020b). To be specific, when trade openness is low, opening up and economic growth quality are positively correlated;
when trade openness increases to the second threshold interval, opening up and economic growth quality are negatively correlated;
and when trade openness further rises, opening up and economic growth quality demonstrate a positive correlation once again.
Hence, increasing trade openness is a guaranteed method for improving China's economic growth quality (Chen and Z, 2010). In
addition, the provinces and cities during the period of 1994-2018 are classified on the basis of different trade openness, as shown in
Table 7. It can be seen that from 1994 to 2018, the degree of trade openness of all cities in China increased steadily, the degree of
trade openness of most cities is getting higher and higher, and the quality of economic growth is also getting higher and higher. This
proves the first conclusion: trade openness can significantly improve the quality of economic growth.
5. Conclusions
An ARDL model and a threshold model have been applied in order to analyze the relationship between trade openness and
economic growth quality under exchange rate fluctuations. Based on the above empirical results, the following conclusions can be
drawn: Firstly, that there is a long-term stable co-integration relationship between degree of trade openness and quality of economic
growth. Moreover, trade openness significantly promotes the quality of economic growth in both short and long terms. Secondly, that
the positive effect of trade openness on economic growth quality is statistically significant, with obvious regional heterogeneity.
Thirdly, that an “N-type” relationship exists between trade openness and economic growth quality. The above conclusions show that
opening up is an effective means for improving the quality of China’s economic growth. This not only enriches the modeling and
discussion of China’s trade under the new growth theory, but also, to a certain extent, enhances the theory's explanatory power.
Foreign trade will effectively improve the quality of economic growth by promoting capital formation, accelerating technological
progress, and increasing factor productivity. Therefore, the establishment of a comprehensive and open economic system is one of the
key measures necessary for promoting China’s economic growth in the high-quality development stage.
Author statement
I have made substantial contributions to the conception or design of the work; or the acquisition, analysis, or interpretation of
data for the work. I have revised the work critically for important intellectual content; and I have approved the final version to be
published.
I agree to be accountable for all aspects of the work in ensuring that questions related to the accuracy or integrity of any part of
the work are appropriately resolved.
All persons who have made substantial contributions to the work reported in the manuscript, including those who provided
editing and writing assistance but who are not authors, are named in the Acknowledgments section of the manuscript and have given
their written permission to be named.
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According to the division criteria published by the National Bureau of Statics, the eastern region included 11 provincial-level administrative
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