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The Renminbi Equilibrium Exchange Rate: an agnostic view

Author

Listed:
  • Antoine Bouveret

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Sana Mestiri

    (SDF - Laboratoire Structure et Dynamiques Financières - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres)

  • Henri Sterdyniak

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

The supposed undervaluation of the renminbi has been the subject of intensive academic research over the past few years. Using equilibrium exchange rate models (Purchasing Power Parity, BEER and FEER), many authors have concluded that the renminbi is undervalued by 15 to 30% against the dollar. This article shows that the common view is not that obvious. The models used in the estimation (BEER or FEER) assume that the economy is at full-employment, a strong hypothesis for developing economies such as China, whose unemployed amount to 150 million people. On the contrary, we show that China is facing massive unemployment and if investment depends on expected potential demand (from domestic consumption and foreign demand), then an undervalued exchange rate (by traditional standards) is suited for its policy objectives. Therefore the exchange rate can be analyzed as a policy tool used by the Chinese authorities to pursue their objectives. The exchange rate can be undervalued by traditional standards and in equilibrium compared to the government's policy objectives. This article shows that equilibrium exchange rate theories are not suited for developing countries and therefore the concept of equilibrium exchange rate is highly questionable. The final section analyzes the adoption of a managed float regime by the Popular Bank of China and discusses the delicate issue of the best exchange rate regime for China.

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  • Antoine Bouveret & Sana Mestiri & Henri Sterdyniak, 2006. "The Renminbi Equilibrium Exchange Rate: an agnostic view," SciencePo Working papers Main hal-01073825, HAL.
    • Handle: RePEc:hal:spmain:hal-01073825
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-01073825
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    Cited by:

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    2. Das, Dilip K., 2009. "The evolution of renminbi yuan and the protracted debate on its undervaluation: An integrated review," Journal of Asian Economics, Elsevier, vol. 20(5), pages 570-579, September.
    3. Ana Cardoso & António Portugal Duarte, 2017. "The impact of the Chinese exchange policy on foreign trade with the European Union," Brazilian Journal of Political Economy, Center of Political Economy, vol. 37(4), pages 870-893.

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    More about this item

    Keywords

    equilibrium exchange rate; exchange rate management; China economic strategy;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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