RMB Undervaluation and Appreciation

Abstract

The bilateral real exchange rate between Chinese renminbi (RMB) and the US dollar is studied. The panel data Penn effect model shows that the RMB was overvalued in 1980-1991 but later undervalued in 1992-2010. In 2010, it was undervalued by 36.7%. Econometric analysis and an examination of the appreciation of seventeen currencies belonging to countries and areas under the same economic development stage show that the RMB should appreciate at an annual speed of 3.2%. At this rate, the RMB misalignment in 2010 will be corrected by 2020. In the future, RMB appreciation should be realized totally from the nominal exchange rate, not partly from the nominal exchange rate and partly from the relative price level. This appreciation path satisfies the interests of both China and the US.

Keywords: Chinese renminbi, Real exchange rate, Penn effect, Undervaluation, Appreciation

JEL Classification: F31, F41