Strategic role of trade relations between Islamic countries and China: Empirical evidence from Malaysia

Trade relations between countries are vital for economic growth and this should be true regardless of the ideological differences between them. This article examines the equilibrium relationship of trades between Malaysia as an Islamic country and China and its impact on the growth of Malaysian economy. The study uses quarterly data from the first quarter of 1999 to the fourth quarter of 2011. Using the standard Vector Autoregressive (VAR) estimation method, this research applies the integration test, co-integration test and Granger causality test in the form of Vector Error Correction Model (VECM). The empirical results show the existence of long-term equilibrium relationship between the growth of Malaysian economy with real Malaysia s export to China, real Malaysia s import from China (IMm), and real Gross Domestic Product of China (GDPc). From the aspect of short term Granger causality relationship, it is found that the GDPc influences GDPm and IMm. In addition, it is proven that the growth of EXm is only influenced by the growth in Malaysian economy and this finding supports the growth-led export (GLE) hypothesis.