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Appreciating the Renminbi

  • Rod Tyers


  • Iain Bain

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, while evidence on China’s productivity and prices supports this hypothesis, its real exchange rate has shown no long run tendency to appreciate. The use of a global numerical model allows extensions of the hypothesis, including failures of the law of one price for tradable goods, which point to WTO accession trade reforms and China’s high saving rate as key depreciating forces since the late 1990s. The same model is then applied to the implications of premature RMB appreciation. It is shown that, unless this is achieved in association with the repatriation of foreign reserves, which would require thus far unavailable financial depth in the Chinese economy, unilateral RMB appreciation would be destructive of both Chinese and global interests.

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Paper provided by The Australian National University, Arndt-Corden Department of Economics in its series Departmental Working Papers with number 2007-09.

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Length: 37 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:pas:papers:2007-09
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