1.1 rapidly. In this context, enhancing connectivity between

1.1  Problem Statement

The literature
shown has indicated that exchange rate volatility can create severe disturbance
for any economy. Pakistan like other developing countries recently has faced similar
problems. Therefore, the research in this paper would help to explain how
volatility of exchange rate is affecting Pakistan’s bilateral trade (export
& import) with China.

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1.2  Research Questions

In which
direction exchange rate instability affects Pakistan’s bilateral trade with its
neighbor China?

How exchange rate volatility affects import of
Pakistan from China?

How exchange rate volatility affects exports of
Pakistan to China?



1.3  Significant of the study

Pakistan and
China the two neighbors have a long history of reliable and time tested
relationship. Pak-China friendship has been proved to be a beneficial friendship
between two neighboring states and model of friendship for other states. Both
States have solid political, defense, social and economic relations in the region.

Both countries
have witnessed steady growth in mutual investments in recent past. In the last
few years, China has invested more than US$1.3 billion in Pakistan’s favor. A large
number of Chinese companies with their investments are presently operating in
Pakistan in different sectors of industry. Chinese goods are in high demand of the
local on large scale Pakistani markets.

Both countries
have continued with their ties in the positive direction to undertake mega
economic projects changing fortunes for the region like the China-Pakistan
Economic Corridor (CPEC) connecting the Pakistani port of Gwadar with Kashgar (Xinjiang
region) of China. Other projects where work is under way include construction
of dams and Chinese investment in Pakistani industries of textile, energy,
banking, commerce and industry sectors and numerous other development projects allowing
growth in economy rapidly.

In this context,
enhancing connectivity between states and agreements on widening economic and
trade cooperation, promoting economic integration, raising economic development
of the two countries will also benefit the land locked countries in the region.

Bilateral trade
of the countries has reached US$ 9.3 billion in 2015. The balance is in favor
of China with major income. The balance of trade deficit increased from US$
2.50 billion in 2010-11 to US$ 4.68 billion in 2014-15 approximately. A major
factor of trade deficit with China of Pakistan is growing exports of Chinese
products to Pakistan local market including raw materials and capital goods.
Since these are more economically benefitting businessmen, so they are inclined
to buy more products and services from China. Pakistan therefore, should be
looking at China as an export market, but also as a primary source for import
of capital goods and industrial raw material.

According to
Pakistan Economic Survey Overview of 2015-16 the country’s total foreign
exchange reserves touched to highest level to US$ 21.4 billion by May, 2016,
compared to US$ 18.6 billion in the end of June 2015 exchange rate remained at
Rs.104.75 per US$ in May FY2016, related to PKR 101.78 per US$ at completion of
June 2015. The devaluation of Pak Rupee’s was around 2.9 percent during the period
of July-May FY2016.

Therefore, due
to increasing bilateral trade between the states has effected volatility of
exchange rate in Pakistan, this study is an effort and a temporal contribution
with respect to Pakistan’s money in view to probe that either exchange rate
volatility has been effected by Pakistan’s trade with China if so, then to what
extent. This is an important study in regard because environment of Pakistan is
more volatile and in the recent times. 2015-2016 it is revealed that Pakistani
exchange rate has been devalued by 2.9 percent during period of July-May
FY2016. So this is an important and much needed study which will give indication
to the policy makers that how they shall set the future strategies to determine
the exchange rate in the economy of Pakistan. And how they will improve their
strategies to save the economy from the threat of exchange rate instability,
and how they will improve strategies of trade with China and other countries in
the future.

1.4  Objectives of the Study

The main focus of
the study and paper is the impact of the Chinese trade on exchange rate of Pakistan.
The Emphasis of the paper are on the objectives:

To scrutinize the impact of exchange rate
volatility on imports and exports of Pakistan with China.

To check the cause behind the exchange rate
volatility in Pakistan.


1.5  Delimitation                               

This study will be covering
the data period from 1980 to 2015 using annual data of variables from Pakistan
Bureau of Statistics and World Bank. The data are taken for Pakistan’s exports
to China and Pakistan’s imports from China. Due to lack of availability of
seasonal data of import and exports we will only take the data annually. We
will analyze the data by two methods descriptive and co-integration analysis. E-Views will be used for testing of time series data.