Whither the Chinese Yuan? Is the RMB Still Undervalued?

© 2014 Prof. Farok J. Contractor, Rutgers University

Introduction to my May 8, 2014 YaleGlobal Online article: “Renminbi Undervalued? Think Again”

The exchange rate between the US dollar and the Chinese Renminbi Yuan (RMB) is of crucial importance to both the American and Chinese economies since the bilateral trade between the two nations (imports plus exports) is nearing $600 billion per year. America’s exports to China lag imports from that country—a huge deficit of $318 billion in 2013.

For at least 18 years, the US has been pushing China to appreciate its currency in order to make Chinese goods more expensive to US buyers and/or reduce profit margins for the Chinese exporters in order to reduce the deficit. Grudgingly, the Chinese have yielded to American pressure and entreaties, and under the direction of their central bank they have engineered a gradual 35 percent appreciation in the nine years since June 2005. The RMB, which was pegged at 8.27 per dollar in June 2005, has today risen to 6.1. All indicators point to an unwillingness on the part of the Chinese to appreciate their currency any further. With the now stronger RMB and persistently higher materiel and wage inflation in China’s manufacturing sector, many Chinese factories have reached the point where they are not as competitive anymore. This is the main reason we should not expect further appreciation of the RMB for a while.

My YaleGlobal article gives a rare historical perspective from the year 1980 on the RMB vs. dollar exchange rate, as well as on inflation figures from both economies. This analysis shows how the RMB has gone from overvaluation in the 1980s, to undervaluation between 1990 and 2005, to today’s exchange rate, which several observers feel is near an appropriate valuation.

The full article is available here: Renminbi Undervalued? Think Again.

ORIGINAL POST ON ARCHIVE

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