Is the Chinese Currency Substantially Misaligned to Warrant Further Appreciation?

This study provides quarterly estimates of the misalignment in the real effective exchange rate (REER) of Renminbi (RMB) for the period 1999–2008. Starting from a commonly used economic approach, the estimates are obtained from an extensive application of econometric techniques on a carefully constructed database that covers 22 economies that account for roughly 70 per cent of China’s total foreign trade. Our estimates demonstrate that the RMB underwent a period of undervalued misalignment during the early to mid-2000s, if measured vis-à-vis the REER of a multilateral currency basket of the 22 economies, but the misalignment margin has disappeared since 2008. However, if the RMB is only evaluated by a subpanel dataset including only the United States and the Euroland, the resulting misalignment estimates are much more pronounced and withstand the recent recession. The difference between the full-panel dataset and subpanel dataset estimates suggests that the current misalignment problem lies more with overvalued USD and euro rather than with an undervalued RMB. The finding thus refutes the claim that the current global trade imbalance could be resolved mainly by further and greater appreciation of the RMB