Purchasing power parity between China and selected BRI countries in Asia

Abstract

Purpose: This study tests the validity of purchasing power parity (PPP) between China and the 18 other Asian countries that have joined the ‘Belt and Road Initiative’ (BRI). The Chinese Government launched the BRI plan to enhance trade and promote market integration among the participating countries. The validity of PPP reflects the degree of market integration and serves as a prerequisite for future economic integration. Study design/methodology/approach: Nonparametric nonlinear rank tests are used to examine whether this is any cointegration in the PPP models. This testing approach is valid even if the functional form of PPP is unknown or nonlinear. Additionally, we address the rank problem in the multivariate PPP models. Findings: Our empirical results reveal strong evidence of the PPP relationship and reasonably strong evidence of nonlinearity in the data. Our findings show that some Asian BRI countries have experienced integration of their markets with that of China during the recent decade but not over the entire sample period. This implies that China’s economic power has been rising with larger trade volumes with Asian trading partners, especially during the most recent decade, which, in turn, infers that the integration of markets through BRI projects has been enhanced. However, hidden transaction costs due to geopolitical risks may have resulted in the failure of the PPP relationship between China and some Asian countries during the past decade. The findings of PPP in our paper are useful for academics, practitioners, and policymakers in making better decisions for trading between China and the Asian BRI countries. Practical Implications: The findings imply that China should get better economic cooperation and greater economic integration with all the Asian BRI members. However, the fear of geopolitical risks and military conflicts in Asia could lead to an increase in transaction costs, resulting in drawbacks from the PPP relationship between China and the Asian countries, especially after the Russia-Ukraine war.