1.1 rapidly. In this context, enhancing connectivity between

1.1  Problem StatementThe literatureshown has indicated that exchange rate volatility can create severe disturbancefor any economy. Pakistan like other developing countries recently has faced similarproblems. Therefore, the research in this paper would help to explain howvolatility of exchange rate is affecting Pakistan’s bilateral trade (export& import) with China.1.2  Research QuestionsIn whichdirection exchange rate instability affects Pakistan’s bilateral trade with itsneighbor China?·      How exchange rate volatility affects import ofPakistan from China?·      How exchange rate volatility affects exports ofPakistan to China?  1.3  Significant of the studyPakistan andChina the two neighbors have a long history of reliable and time testedrelationship.

Pak-China friendship has been proved to be a beneficial friendshipbetween two neighboring states and model of friendship for other states. BothStates have solid political, defense, social and economic relations in the region.Both countrieshave witnessed steady growth in mutual investments in recent past. In the lastfew years, China has invested more than US$1.3 billion in Pakistan’s favor. A largenumber of Chinese companies with their investments are presently operating inPakistan in different sectors of industry. Chinese goods are in high demand of thelocal on large scale Pakistani markets.Both countrieshave continued with their ties in the positive direction to undertake megaeconomic projects changing fortunes for the region like the China-PakistanEconomic Corridor (CPEC) connecting the Pakistani port of Gwadar with Kashgar (Xinjiangregion) of China.

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Other projects where work is under way include constructionof dams and Chinese investment in Pakistani industries of textile, energy,banking, commerce and industry sectors and numerous other development projects allowinggrowth in economy rapidly.In this context,enhancing connectivity between states and agreements on widening economic andtrade cooperation, promoting economic integration, raising economic developmentof the two countries will also benefit the land locked countries in the region.Bilateral tradeof the countries has reached US$ 9.3 billion in 2015.

The balance is in favorof 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 majorfactor of trade deficit with China of Pakistan is growing exports of Chineseproducts to Pakistan local market including raw materials and capital goods.Since these are more economically benefitting businessmen, so they are inclinedto buy more products and services from China. Pakistan therefore, should belooking at China as an export market, but also as a primary source for importof capital goods and industrial raw material.

According toPakistan Economic Survey Overview of 2015-16 the country’s total foreignexchange 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 atRs.104.75 per US$ in May FY2016, related to PKR 101.78 per US$ at completion ofJune 2015.

The devaluation of Pak Rupee’s was around 2.9 percent during the periodof July-May FY2016.Therefore, dueto increasing bilateral trade between the states has effected volatility ofexchange rate in Pakistan, this study is an effort and a temporal contributionwith respect to Pakistan’s money in view to probe that either exchange ratevolatility has been effected by Pakistan’s trade with China if so, then to whatextent. This is an important study in regard because environment of Pakistan ismore volatile and in the recent times.

2015-2016 it is revealed that Pakistaniexchange rate has been devalued by 2.9 percent during period of July-MayFY2016. So this is an important and much needed study which will give indicationto the policy makers that how they shall set the future strategies to determinethe exchange rate in the economy of Pakistan. And how they will improve theirstrategies to save the economy from the threat of exchange rate instability,and how they will improve strategies of trade with China and other countries inthe future.1.4  Objectives of the StudyThe main focus ofthe 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 ratevolatility on imports and exports of Pakistan with China.

·      To check the cause behind the exchange ratevolatility in Pakistan. 1.5  Delimitation                                This study will be coveringthe data period from 1980 to 2015 using annual data of variables from PakistanBureau of Statistics and World Bank. The data are taken for Pakistan’s exportsto China and Pakistan’s imports from China. Due to lack of availability ofseasonal data of import and exports we will only take the data annually. Wewill analyze the data by two methods descriptive and co-integration analysis. E-Views will be used for testing of time series data.

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