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Appreciating the Renminbi

  • Rod Tyers


  • Ying Zhang

International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with an underlying real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis, which sees growth as stemming from improvements in traded sector productivity and associated rises in wages and non-traded prices. Yet, despite extraordinary growth after the mid-1990s China’s real exchange rate showed no tendency to appreciate until after 2004. We use a dynamic general equilibrium model to simulate the economy and show that, during this period, trade reforms and a rising national saving rate were offsetting forces in the presence of elastic labour supply. We then examine the possible determinants of the striking transition to real appreciation thereafter, noting mounting evidence that an improved rural terms of trade has tightened China’s labour market. We show that, should the Chinese government bow to international pressure by appreciating the renminbi either via an extraordinary monetary contraction or via export disincentives the consequences would be harmful for both Chinese and global interests.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2010-30.

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Length: 36 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:een:camaaa:2010-30
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  12. Rod Tyers & Yongxiang Bu & Ian Bain, 2006. "China’s Equilibrium Real Exchange Rate: A Counterfactual Analysis," ANU Working Papers in Economics and Econometrics 2006-466, Australian National University, College of Business and Economics, School of Economics.
  13. Rod Tyers & Jane Golley, 2006. "China's Growth to 2030: Demographic Change and the Labour Supply Constraint," PGDA Working Papers 1106, Program on the Global Demography of Aging.
  14. Liu, Jing & Nico van Leeuwen & Tri Thanh Vo & Rod Tyers & Thomas W. Hertel, 1998. "Disaggregating Labor Payments by Skill Level in GTAP," GTAP Technical Papers 314, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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  29. Rees, Lucy & Tyers, Rod, 2004. "Trade reform in the short run: China's WTO accession," Journal of Asian Economics, Elsevier, vol. 15(1), pages 1-31, February.
  30. Cai Fang & Wang Dewen, 2005. "Demographic transition: implications for growth," Labor and Demography 0512001, EconWPA.
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