Structural Effects of a Real Exchange Rate Revaluation in China (original) (raw)
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Structural Effects of a Real Exchange Rate Revaluation in China: A CGE Assessment
SSRN Electronic Journal, 2000
The misalignment of the Chinese currency exposed by the rapid build-up of China's foreign exchange reserves over the past few years has been the subject of considerable recent debate. Recent econometric studies suggest a Renminbi undervaluation on the order of 10 to 30%. The modest revaluation of July 2005 is widely perceived as insufficient to correct China's balance-of-payments disequilibrium and has not silenced charges that China is engaging in persistent one-sided currency manipulation. Within China there are widespread concerns regarding the adverse employment effects of a major revaluation on labourintensive export sectors, yet the likely magnitude of these effects remains a controversial issue. The paper aims to shed light on this question by simulating the structural effects of a real exchange rate revaluation that lowers the current account surplus-GDP by 4 percentage-points using a 17-sector computable general equilibrium model of the Chinese economy.
China's Equilibrium Real Exchange Rate: A Counterfactual Analysis
Pacific Economic Review, 2008
China's maintenance of a de facto peg against the US dollar during and following the Asian financial crisis caused a realignment of exchange rates in the Asian region. This paper explores the "equilibrium" level of China's real effective rate in the lead-up to, during and following that crisis. An adaptation of the Devarajan-Lewis-Robinson threegood general equilibrium model is employed to estimate time paths of the equilibrium real effective exchange rate under a variety of assumptions about the balance of trade. Key requirements of the model are indices of import and export prices in time series. Since these are unavailable from secondary sources they are here constructed from trade data. The results suggest that, while there is no clear evidence of undervaluation as of 2004, China's real effective exchange rate was on the low side in the lead-up to and during the crisis, due in part to an extraordinary rate of accumulation of foreign reserves and an associated trade surplus following the integration of its hitherto multiple exchange rates in 1994. If, instead, China had run a more typical trade deficit, say amounting to 10 per cent of export revenue or 1.5 per cent of GDP, it is estimated that China's real effective exchange rate would have been higher by about a tenth prior to the crisis.
China's maintenance of a de facto peg against the US dollar during and following the Asian financial crisis caused a realignment of exchange rates in the Asian region. This paper explores the "equilibrium" level of China's real effective rate in the lead-up to, during and following that crisis. An adaptation of the Devarajan-Lewis-Robinson threegood general equilibrium model is employed to estimate time paths of the equilibrium real effective exchange rate under a variety of assumptions about the balance of trade. Key requirements of the model are indices of import and export prices in time series. Since these are unavailable from secondary sources they are here constructed from trade data. The results suggest that, while there is no clear evidence of undervaluation as of 2004, China's real effective exchange rate was on the low side in the lead-up to and during the crisis, due in part to an extraordinary rate of accumulation of foreign reserves and an associated trade surplus following the integration of its hitherto multiple exchange rates in 1994. If, instead, China had run a more typical trade deficit, say amounting to 10 per cent of export revenue or 1.5 per cent of GDP, it is estimated that China's real effective exchange rate would have been higher by about a tenth prior to the crisis.
Real Exchange Rate Misalignment in China: An Empirical Investigation
Journal of Comparative Economics, 2001
Zhang, Zhichao-Real Exchange Rate Misalignment in China: An Empirical Investigation Based on the theory of equilibrium real exchange rate, this paper estimates the behavioral equilibrium exchange rate and the resulting misalignment in China. Evidence shows chronic overvaluation in China's central planning period, but economic reforms have brought the real exchange rate closer to equilibrium. The cumulative effect of exchange rate reform led to a substantial real depreciation of the Chinese currency after 1981. Indications are that China now has a proactive exchange rate policy with the nominal exchange rate used as a policy tool to attain real targets.
Reforms of China’s exchange rate regime and the renminbi internationalization
Ekonomia i Prawo
Motivation: After four decades of very successful reforms, China has become one of the largest economies in the world. An important area of these reforms is the exchange rate system and monetary policy, which over the years has complied with economic objectives, in particular the promotion of economic growth by improving export competitiveness. The progressive liberalisation of the Chinese economy and its ever closer integration into the world economy require this policy to be adapted to changing circumstances. Aim: The aim of the article is to analyze China's exchange rate policy from the perspective of the dilemma of choosing between using this policy to support export competitiveness and striving to internationalise the renminbi. Moreover, the author assesses the consequences of this policy for China's economy and for the world economy. The study includes theoretical research (analysis of the literature and research reports) and empirical research (analysis of statistical data) using a descriptive analysis. Results: For many years China's exchange rate policy has been focused on supporting economic growth by improving export competitiveness, resulting in both increasing internal imbalances and difficulties in stabilising inflation, as well as the accumulation of global payments imbalances. Since 2005 China has made its currency more flexible, so that the underestimation of the renminbi's exchange rate has decreased. In recent years, China has intensified its efforts to support the internationalisation of the renminbi. However, the renminbi is not yet in rivalry with the US dollar as the dominant international currency, although the Chinese currency's share as an international currency is increasing, which should have a positive impact on the stability of global financial relations.
How Robust Are Estimates of Equilibrium Real Exchange Rates: The Case of China
Pacific Economic Review, 2009
This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Increased attention is being paid to assessments of the actual values of countries' real exchange rates relative to their "equilibrium" values as suggested by "fundamental" determining factors. This paper assesses the robustness of alternative approaches and models commonly used to derive equilibrium real exchange rate estimates. Using China's currency to illustrate this analysis, the variance in estimates raises serious questions regarding how robust the results are. The basic conclusion from the tests used here is that, at least for China, small changes in model specifications, explanatory variable definitions, and time periods used in estimation can lead to very substantial differences in equilibrium real exchange rate estimates. Thus, such estimates should be treated with great caution.
Estimate of Equilibrium Real Exchange Rate and Misalignment of Chinese Yuan Vis-a-Vis US Dollar
The paper examines the misalignment in equilibrium real exchange rate of Chinese Yuan against US dollar. The data covered the period of 1980-2014, it used Vector Autoregressive model, the variables are not stationary at level and became stationary after first differencing and there were three co-integration vectors. The long run coefficients have expected sign except for interest rate differential and are significant at 5 percent significance level. The speed of adjustment of real exchange rate to it equilibrium indicated that the disequilibrium in the last period are corrected by 87 percent each year and highly significant. The Yuan was overvalued by 4 percent, from 1981-1990 and in1990 it was undervalue about 4 percent and move back to equilibrium, the highest overvaluation was in 1993 up to 13 percent from equilibrium value and undervalue in 1994 by 14 percent which was the highest level of undervaluation, between 1996 to 2005 the Yuan was relatively within it equilibrium and slightly over value to 3.8 percent in 2008 back to long time path in 2011 and relatively undervalue by 1-3 percent since 2012, in general the Yuan is not substantially undervalue as claims in some studies both theoretical and empirical estimation and the movement in the exchange rate are consistent with economic fundamental of China.