Renminbi Nominal Effective Exchange Rate for Third Market Competition: An Approach Based on Disaggregated Trade Data

When measuring the nominal effective exchange rate (NEER), three factors should be considered: direct import competition, direct export competition and third market competition. The traditional NEER methodology using aggregated export trade data underestimates the competition between countries producing homogeneous goods, so that the weight of the effective exchange rates is too reliant on trade scale. Based on 2002 6-digit items of the Harmonized Commodity Description and Coding System, this paper employs the competitive stress index to adjust the weighting system of the renminbi NEER for third market competition. In the new weighting system, European countries and some emerging economies have higher weights compared with some of the developed countries, including the USA, Japan and resources-dominated economies. This research will facilitate the understanding of changes in China's export competitiveness.