Just How Undervalued is the Chinese Renminbi?

Abstract

Given that the value of China's currency has been hot topic recently, this paper explores the equilibrium levels of China's real and nominal exchange rates. Employing a Johansen cointegration framework, we focus on the behavioral equilibrium exchange rate (BEER) and permanent equilibrium exchange rate (PEER) models. Our results suggest that, while the renminbi is somewhat undervalued against the dollar, the misalignment is not nearly as exaggerated as many popular claims.

Is the Chinese Currency Substantially Misaligned to Warrant Further Appreciation?

“…Interestingly, the evidence of undervaluation is now persistent and substantial, well exceeding 10 per cent since 2003 though significantly reduced by the current recession, as shown from the average curve. In particular, our results corroborate the estimates of around 3-6 per cent undervaluation at 2002 by Funke and Rahn (2005), whose model is RPI-based covering only the United States, Japan and the Euroland. Furthermore, our results demonstrate how a narrow choice of the US plus Euroland data base can produce strong evidence of a substantially undervalued RMB.…”

The Renminbi and Poor‐country Growth

“…To analyse the HBS‐implied currency misalignment for a given year, the following simple model was estimated: 3 ordinary least squares (OLS) is used to estimate a cross‐country log regression of the values of a price‐level index, , where PPP i is the implied purchasing power parity (PPP) exchange rate and is the nominal market exchange rate versus the US dollar, on the GDP per capita (in 2000 constant US dollars) for each country. In this way, and similarly to Funke and Rahn (2005), serves as a PPP ‐based estimate of the real exchange rate for each country i of our sample, while GDP per capita provides a proxy of the country’s productivity level, reflecting the state of economic development. Given the wide variance of the price level index values for advanced economies, GDP per capita (in constant 2000 US dollars) is used as the dependent variable and not the ratio of GDP per capita compared to the US level 4…”

Volatility transmissions between renminbi and Asia-Pacific on-shore and off-shore U.S. dollar futures

“…The PBoC publishes the central parity every evening (necessitated by the fact that they have capital control and RMB is not freely tradable). 5 Funke and Rahn (2005) have estimated that the renminbi exchange rate against the U.S. dollar is undervalued by 10-15 percent compared to the equilibrium rate. A survey of equilibrium exchange rate estimates for China is provided by Li and Dunaway (2005) and Dunaway et al (2006).…”