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Relevant international experience of real exchange rate adjustment for China

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  • XU, Yingfeng

Abstract

Is the real appreciation of the Chinese yuan essential for correcting global imbalances? The present study offers a new perspective to the debate by drawing upon the rich international experience embodied in World Bank's World Development Indicators database. We find that the price levels of China and the United States are both low relative to the world's average. Therefore, the discrepancy between the price levels of China and the United States has been, in fact, close to zero since 2002. The difference in per capita income can fully account for the price difference between China and the United States. However, the Balassa-Samuelson effect is not a reliable guide for projecting the trend of real appreciation. According to the experience of those economies that have experienced real currency appreciation against the US dollar in 1985-2005, the mode of faster wage growth and inflation is as common as nominal appreciation, far more common for economies with a low initial price level. We do not find empirical evidence to substantiate the claim that low price levels tend to cause external surpluses. But real appreciation has a powerful effect in boosting job creation in the service sector. Therefore, the real appreciation of the Chinese yuan would contribute to restructuring the Chinese economy towards a domestic demand-based growth track.

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Bibliographic Info

Article provided by Elsevier in its journal China Economic Review.

Volume (Year): 20 (2009)
Issue (Month): 3 (September)
Pages: 440-451

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Handle: RePEc:eee:chieco:v:20:y:2009:i:3:p:440-451

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Web page: http://www.elsevier.com/locate/chieco

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Keywords: China Appreciation External balance Service sector;

References

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  1. Huang, Haizhou & Wang, Shuilin, 2004. "Exchange rate regimes: China's experience and choices," China Economic Review, Elsevier, vol. 15(3), pages 336-342.
  2. Lamin Leigh & Steven Vincent Dunaway & Xiangming Li, 2006. "How Robust Are Estimates of Equilibrium Real Exchange Rates," IMF Working Papers 06/220, International Monetary Fund.
  3. Maurice Obstfeld, 2007. "The Renminbifs Dollar Peg at the Crossroads," IMES Discussion Paper Series 07-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
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  6. McKinnon, Ronald I., 2004. "The East Asian dollar standard," China Economic Review, Elsevier, vol. 15(3), pages 325-330.
  7. Chang, Gene Hsin & Shao, Qin, 2004. "How much is the Chinese currency undervalued? A quantitative estimation," China Economic Review, Elsevier, vol. 15(3), pages 366-371.
  8. Haihong Gao, 2006. "Real Exchange Rate in China : A Long-run Perspective," Macroeconomics Working Papers 21969, East Asian Bureau of Economic Research.
  9. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
  10. Yang, Jiawen, 2004. "Nontradables and the valuation of RMB--An evaluation of the Big Mac index," China Economic Review, Elsevier, vol. 15(3), pages 353-359.
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  12. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  13. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  14. Xu, Yingfeng, 2000. "China's exchange rate policy," China Economic Review, Elsevier, vol. 11(3), pages 262-277.
  15. Haihong Gao, 2006. "Real Exchange Rate in China: A Long-run Perspective," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 14(4), pages 21-37.
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Cited by:
  1. Zhibai, Zhang, 2012. "RMB Undervaluation and Appreciation," MPRA Paper 40978, University Library of Munich, Germany.
  2. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.

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