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In Search of an Optimal Strategy for Yuan’s Real Revaluation

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  • Dai, Meixing

Abstract

International commentators seem to have a consensus view that the Chinese yuan is substantially undervalued and the Chinese monetary authority must take speedy actions to redress the currency misalignment by rapid nominal revaluation. This paper argues for a gradualist but comprehensive strategy for adjusting RMB’s exchange rate. Taking into consideration of the facts that the yuan’s undervaluation is caused by an array of domestic and international factors and the Chinese central bank cannot effectively invest its growing holdings of foreign reserves, we develop a framework to provide a theoretical underpinning for the optimal strategy for renminbi’s gradual revaluation. With this strategy, the renminbi undervaluation problem is gradually redressed through a combination of nominal appreciation and higher inflation plus some other structural and macroeconomic policies. This strategy can also allow absorb external imbalances hence strengthening the foundation of China’s long-term growth.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41047.

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Date of creation: Sep 2012
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Handle: RePEc:pra:mprapa:41047

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Keywords: Real revaluation; renminbi (RMB); foreign reserves; external imbalances; macroeconomic adjustment;

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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. Jinzhao Chen, 2009. "Beyond Cheap Talks: Assessing the Undervaluation of the Chinese Currency Between 1994 and 2007," Economie Internationale, CEPII research center, issue 119, pages 47-82.
  3. Ted H Chu, 2005. "The Chinese RMB: Its Value, Its Peg, and Its Future," Business Economics, Palgrave Macmillan, vol. 40(2), pages 7-17, April.
  4. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
  5. Qianbing Chen, 2009. "Why China Should Invest Its Foreign Exchange Reserves in the Major US Banks," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(4), pages 1-17.
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