is china’s currency substantially undervalued? duo qin soas (school of oriental and african...

Is China’s Currency Substantially Undervalued?

Duo QINSOAS (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

Problems: data samples and methods differ

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

Basic Model (2 versions) ititiitiiit uNFAGDPr 1121110 lnln

Two ways of estimation Johansen cointegrationSingle equation long-run

Panel (dynamic panel method): Assuming identical parameters of interest

ititiitiiit uNFARPIr 2222120 lnln

Real exchange rate

Ratio of real per capita GDP

Ratio of per capita net foreign assets

Ratio of CPI-PPI ratios

REER Misalignments

n

iititt

n

iititt

uwm

uwm

122

111

exp

exp

Another set for panel results

REER series of the RMB

Misalignm

ents as percentage of the 22-econom

y based RE

ER

Misalignm

ents as percentage of the trilateral-currency based R

EE

R

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

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

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)

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)

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

Full panel Sub panel Japanese yen

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1977 1979 1982 1985 1988 1990 1993 1996 1999

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1977 1979 1982 1985 1988 1990 1993 1996 1999


D-mark

-15%

-10%

-5%

0%

5%

10%

15%

20%

1977 1979 1981 1983 1985 1987 1989

-15%

-10%

-5%

0%

5%

10%

15%

20%

1977 1978 1980 1982 1984 1985 1987 1989

Full panel Sub panel



Singapore dollar

-10%

-5%

0%

5%

10%

15%

20%

25%

1984 1986 1988 1990 1993 1995 1997 1999

-15%-10%

-5%0%5%

10%15%20%25%

1984 1986 1988 1990 1993 1995 1997 1999



Taiwan dollar

-20%-15%-10%

-5%0%

5%10%15%20%

1984 1986 1989 1991 1994 1996 1999

-20%-15%-10%

-5%0%5%

10%15%20%

1984 1986 1988 1990 1993 1995 1997 1999

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

Thank you!

is china’s currency substantially undervalued? duo qin soas (school of oriental and african...

Documents