A Markov Regime-Switching Model on Foreign Trade: The Case of China

Based on Hamilton´ Markov regime-switching model applied to postwar U.S. business cycle (1989,1994), the paper uses Chinese import and export data from January 1999 to November 2010 to describe and investigate the dynamic growth path of China´s foreign trade. The empirical results suggest that the growth path of China´s foreign trade can be classified as long term expansion regime (1999.01-2008.08 and 2008.12-2010.11) and short-term recession regime (2008.09-2008.11), which means the growth path of China´s foreign trade may experience a shift of regime. The global economic situation and Chinese economic policy during these periods may explain the move of regime. Chinese economy needs to shift from export-oriented economic growth to more reliance on indigenous innovation of firms and domestic demand-pulled growth, which maybe not only the results of the 2008 global financial crisis, but also reflects the need for continual growth of Chinese economy in the future.