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Is China’s Currency Substantially Undervalued?

Is China’s Currency Substantially Undervalued?. Duo QIN SOAS (School of Oriental and African Studies), University of London (collaborated with Xinhua HE) (based on two papers: see QM Discussions Papers 660 & 667). YES, from most of the existing studies.

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Is China’s Currency Substantially Undervalued?

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  1. Is China’s Currency Substantially Undervalued? Duo QIN SOAS (School of Oriental and African Studies), University of London (collaborated with Xinhua HE) (based on two papers: see QM Discussions Papers 660 & 667)

  2. YES, from most of the existing studies Problems: data samples and methods differ

  3. Our Approach • Choice of theoretical model: following the BEER (behavioral equilibrium exchange rate) principle • Data: quarterly time series for 1994-2009Q1, covering 70%+ trading partners with China (22 economies) • Econometrics: long-run cointegration; bilateral model estimation and also panel estimation

  4. Basic Model (2 versions) Real exchange rate Ratio of real per capita GDP Ratio of per capita net foreign assets Ratio of CPI-PPI ratios Johansen cointegration Single equation long-run Two ways of estimation Panel (dynamic panel method): Assuming identical parameters of interest

  5. REER Misalignments Another set for panel results

  6. REER series of the RMB

  7. Misalignments as percentage of the 22-economy based REER

  8. Misalignments as percentage of the trilateral-currency based REER

  9. Main findings • REER of RMB is no longer undervalued since the onset of the current global recession • Misalignment still exist between RMB and the US$ and Euro, indicating the latter two being overvalued, especially versus the other currencies in the 22-economy basket

  10. Post sample development • Euro depreciated over 10% during 2009Q4-2010Q2 (measured by SDR) • US$ depreciated over 5% 2010Q3 • In late September 2010, the US House of Representatives overwhelmingly passed a bill approving retaliatory import duties on Chinese goods because of China’s alleged manipulation of RMB

  11. Has RMB misalignment been substantial to qualify for manipulation? • Any historical precedent? (as normally investigated from a legal perspective) • Similar cases: Japan of 1980s; West Germany (similar openness), Singapore (high current account surplus), Taiwan (rapid trade growth in 1980s) But different currency control systems (A subsequent study jointly with LIU Yimeng)

  12. Model Approach • Panel estimation of long-run REER • Data: quarterly from late 1970s to 2000; 17 economies • Full panel versus sub-panel (only have US and Euroland)

  13. Comparison of Estimated MisalignmentsSolid: GDP-based version; dotted: RPI-based version

  14. Comparison of Estimated MisalignmentsSolid: GDP-based version; dotted: RPI-based version Full panel Sub panel

  15. Comparison of Estimated MisalignmentsSolid: GDP-based version; dotted: RPI-based version Full panel Sub panel

  16. Comparison of Estimated MisalignmentsSolid: GDP-based version; dotted: RPI-based version Full panel Sub panel

  17. Main findings • RMB undervalued misalignments are not unprecedented • The estimated long-run relations not distinctively different from that of RMB, irrespective of different currency control systems • The trilateral situation in RMB is most pronounced, implying overvalued euro & US$ • Some lessons to be learnt from the history

  18. Thank you!

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