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The Chinese currency: how undervalued and how much does it matter?

Author

Listed:
  • Phil Garton

    (Treasury, Government of Australia)

  • Jennifer Chang

    (Treasury, Government of Australia)

Abstract

The size of the imbalance in China’s external payments suggests that the RMB is significantly undervalued. This does not appear to have had significant adverse effects on the Chinese economy to date, but the costs of holding down the exchange rate are likely to rise in the future. While the contribution of the RMB to external imbalances is often exaggerated, currency adjustment will be a necessary element of the adjustment process. A more flexible exchange rate is in China's medium-term interests, but the pace of adjustment and its sequencing with other reforms will need to be carefully managed. Precipitate moves could be costly both to China and to global markets.

Suggested Citation

  • Phil Garton & Jennifer Chang, 2005. "The Chinese currency: how undervalued and how much does it matter?," Economic Roundup, The Treasury, Australian Government, issue 4, pages 83-109, December.
    • Handle: RePEc:tsy:journl:journl_tsy_er_2005_4_2
    as

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    File URL: http://archive.treasury.gov.au/documents/1042/PDF/08_RMBundervaluation.pdf
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    References listed on IDEAS

    as
    1. Michael Funke & Jörg Rahn, 2005. "Just How Undervalued is the Chinese Renminbi?," The World Economy, Wiley Blackwell, vol. 28(4), pages 465-489, April.
    2. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2007. "Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 103-132, National Bureau of Economic Research, Inc.
    3. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
    4. Frankel, Jeffrey, 2004. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adustment under a Flexible Rate," Working Paper Series rwp04-037, Harvard University, John F. Kennedy School of Government.
    5. Jeffrey Frankel, 2005. "On the renminbi," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(03), pages 16-21, October.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Fan, Haichao & Li, Yao Amber & Zhao, Chen Carol, 2018. "Margins of imports, forward-looking firms, and exchange rate movements," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 185-202.
    2. Yin-Wong Cheung & Shi He, 2019. "Truths and Myths About RMB Misalignment: A Meta-analysis," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(3), pages 464-492, September.
    3. Yoonbai Kim & Gil Kim, 2012. "The Renminbi Debate: A Review of Issues and Search for Resolution," Chapters, in: Jehoon Park & T. J. Pempel & Geng Xiao (ed.), Asian Responses to the Global Financial Crisis, chapter 4, Edward Elgar Publishing.

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    More about this item

    Keywords

    China; currency; fiscal policy; monetary policy; surplus;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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