The very first anonymous star on the CIA’s wall of honor at Langley, Virginia (the agency rarely identifies its dead heroes), refers to Douglas MacKiernan, the agency’s man in Urumqi, the capital of what is now called the Xinjiang Uyghur Autonomous Region, China’s largest province, a region of some one million square miles in the country’s northwest corner, about one thousand miles west of Beijing.
In recent years, much has been written about the China's rising current account surplus and the importance of its exchange rate policy. At the same time, the increasing integration of China into the global economy has raised questions about how the economy might be affected if the external environment changes. Central to all analysis is the size and stability of China's trade elasticities. If trade elasticities are not stable, then little can be said with any degree of confidence on how the economy might react to such changes. Analyses based on models whose estimated coefficients largely reflect the China of the 1980s and 1990s are likely to turn out to be wrong, perhaps even dramatically. Not only has the structure of trade changed rapidly in China, it is also likely that trade composition itself will be affected by the changes in the exchange rate.
