The RMB Undervaluation Puzzle: An Input-Output Analysis (in Chinese)

Xiang Tang

Peking University - School of Economics

March 1, 2011

The “RMB undervaluation puzzle” refers to two related facts: 1) that the RMB real exchange rate has been depreciating along with China’s strong economic growth; 2) that most Western researchers agree that the RMB is seriously undervalued in recent years. We propose that this puzzle is mainly caused by an inter-regional race to the bottom in China, which reduces average input usage and labor cost, thus seriously depressing the general price and wage level through three types of “price multiplier effects”. We extend the standard input-output model to simulate the price-level effect of racing to the bottom in two key sectors (road transportation and coal mining), using actual input-output data. The results show that, quantitatively, our model can fully explain the “RMB undervaluation puzzle”. The implication is that in order for the RMB real exchange rate to reach and remain at a proper level, inter-regional race to the bottom in China must be effectively tackled, which entails a radical overhaul of China’s economic system and the transition of its development model.


Note: Downloadable document is in Chinese.

Number of Pages in PDF File: 18

Keywords: the RMB real exchange rate, race to the bottom, input-output model

JEL Classification: F31, L51, D57

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Date posted: March 3, 2011  

Suggested Citation

Tang, Xiang, The RMB Undervaluation Puzzle: An Input-Output Analysis (in Chinese) (March 1, 2011). Available at SSRN: http://ssrn.com/abstract=1774077 or http://dx.doi.org/10.2139/ssrn.1774077

Contact Information

Xiang Tang (Contact Author)
Peking University - School of Economics ( email )
Peking University
School of Economics
Beijing, 100871
8610 62752321 (Phone)
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