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Has the Chinese currency been undervalued?

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Author Info

  • Tao Peng
  • Minsoo Lee
  • Christopher Gan

Abstract

China's trade surplus reached a record $102 billion in 2005 while the US trade deficit of $717 billion accounted for 5.8% of US Gross Domestic Product in the same year. US policy makers claim China's currency is undervalued about 25 to 35% against the US dollar and they blame China for holding the value of the RMB weak to keep Chinese products competitive on prices in international markets. Given the unique situation in China, where the capital account is only partially convertible and the economy has been growing at an annual average rate of 10% over the last two decades, this paper empirically examines the magnitude of the exchange rate misalignment of China's RMB against the US dollar by using the Behavioral Equilibrium Exchange Rate (BEER) and Permanent Equilibrium Exchange Rate (PEER) models. Our results show that the RMB was undervalued by approximately 15% from 2002:Q2 to 2003:Q4; however, it is interesting to note that while the RMB was overvalued during 1997:Q4-2002:Q2, China experienced a huge trade surplus during that period.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Chinese Economic and Business Studies.

Volume (Year): 6 (2008)
Issue (Month): 1 ()
Pages: 49-66

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Handle: RePEc:taf:jocebs:v:6:y:2008:i:1:p:49-66

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Related research

Keywords: behavioral equilibrium exchange rate; misalignment; exchange rate regime;

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Cited by:
  1. Meixing Dai, 2011. "Motivations and strategies for a real revaluation of the Yuan," Working Papers of BETA 2011-23, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  2. Gan, Christopher & Ward, Bert & Ting, Su Ting & Cohen, David A., 2013. "An empirical analysis of China's equilibrium exchange rate: A co-integration approach," Journal of Asian Economics, Elsevier, vol. 29(C), pages 33-44.
  3. Chee-Heong Quah & Patrick M. Crowley, 2012. "China and the Dollar: An Optimum Currency Area View," Prague Economic Papers, University of Economics, Prague, vol. 2012(4), pages 391-411.
  4. repec:prg:jnlpep:v:2013:y:2013:i:4:id:431:p:391-411 is not listed on IDEAS
  5. Korhonen, Iikka & Ritola, Maria, 2009. "Renminbi misaligned - Results from meta-regressions," BOFIT Discussion Papers 13/2009, Bank of Finland, Institute for Economies in Transition.

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