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1.1 Problem StatementThe literature shown has shown that exchange rate volatility can create severe disturbance forany economy.

Pakistan like other developing countries recently facing this problem severely.Therefore, incentive to this study is to investigate that how volatility of exchange rate is affectingPakistan’s bilateral trade (export & import) with China.1.2 Research QuestionsIn which direction exchange rate instability affects Pakistan’s bilateral trade with China?? How exchange rate volatility affects import of Pakistan from China?? How exchange rate volatility affects exports of Pakistan to China?61.3 Significant of the studyPakistan and China have an extended history of reliable and time tested relationship. Pak- Chinafriendship has been proved to be a model of friendship between two neighboring states. BothStates have strong political, defense, social and economic relations.China and Pakistan have witnessed steady growth in mutual investments in recent years.

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In thelast few years, China has invested more than US$1.3 billion in Pakistan. A large number ofChinese companies are presently working in Pakistan in different sectors. Chinese goods are verymuch in demand in Pakistani markets.Both countries have continued with their planning to undertake mega economic projects like theChina-Pakistan Economic Corridor (CPEC) connecting the Pakistani port of Gwadar withKashgar (Xinjiang region) in China. Other projects include construction of dams and Chineseinvestment in Pakistani textile, energy, banking, commerce and industry sectors and numerousother development projects.

In this context, enhancing connectivity between China and Pakistan and agreements onexpanding economic and trade cooperation, promoting economic integration, raising economicdevelopment of the two countries will not only benefit China and Pakistan but is expected totransform the entire region.Bilateral trade of China and Pakistan has reached US$ 9.3 billion in 2015. The balance is infavour of China. The balance of trade deficit increased from US$ 2.

50 billion in 2010-11 to US$4.68 billion in 2014-15. An important factor of trade deficit with China is growing exports ofChinese products to Pakistan including raw materials and capital goods. Since these are moreeconomical, businessmen are inclined to buy more and more products and services from China.Pakistan, therefore, should be looking at China not simply as an export market, but as a primarysource for import of capital goods and industrial raw material.According to Pakistan Economic Survey Overview (2015-16) the country’s total foreignexchange reserves touched to highest level to 21.

4 billion US$ by May, 2016, compared to 18.6billion US$ in the end 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 wasaround 2.9 percent during July-May FY2016.

7Therefore, due to increasing bilateral trade between Pakistan and China and volatility ofexchange rate in Pakistan, this study is an effort and a temporal contribution with respect toPakistan to investigate that either exchange rate volatility effect Pakistan’s trade with China if so,then in which extent. This is an important study because environment of Pakistan is more volatileand in the recent time 2015-2016 it is revealed that Pakistani exchange rate has been devalued by2.9 percent during July-May FY2016. So this is an essential study which shell gives direction tothe policy makers to how they set the future strategies to determine the exchange rate in theeconomy of Pakistan. And how they will improve their strategies to save the economy from thethreat of exchange rate instability, and how they improve strategies of trade with China in thefuture.1.

4 Objectives of the StudyThe main objective of this study is to analyze the impact of exchange rate on trade in Pakistanwith China. The specific objectives for this paper are to:? To investigate the impact of exchange rate volatility on imports and exports of Pakistanwith China.? To check the reasons behind the exchange rate volatility in Pakistan.1.5 DelimitationThis study will be covering the data period from 1980 to 2015 using annual data of variablesfrom Pakistan Bureau of Statistics and World Bank. The data are taken for Pakistan’s exports toChina and Pakistan’s imports from China. Due to lack of availability of seasonal data of importand exports we will only take the data annually.

We will analyze the data by two methodsdescriptive and co-integration analysis. E-Views will be used for testing of time seriesdata.

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