Eco:"Is the Chinese yuan undervalued?
Lei Wang
Eco 555
Michael Connolly
Chinese Yuan Still Undervalued
Abstract:
The currency of China, Chinese Yuan, or the Renminbi, is translated to “the people’s currency”. It is issued by The People’s Bank of China, which is the monetary authority of the nation. Most politicians and popular views believe that the Chinese Yuan is undervalued, giving China an unfair competitive advantage towards its major trading partners. When the currency of a nation is “undervalued”, it means that the rate at which it can be exchanged for currencies in other countries is too low. This paper proposes that the Chinese Yuan is still undervalued. Based on previous research, the question of whether the Chinese Yuan is undervalued faces mixed results. The paper, based on Purchasing Power Parity, Big Mac Index, attempts to argue that Chinese Yuan is seriously undervalued.
Outline:
Introduction: an introduction of Chinese Yuan and what “undervalues” mean; previous researches on the appreciation of the Chinese Yuan.
Some scholars argued that the Chinese Yuan is fairly priced (Goh and Kim, 2006; Tatom, 2007), while some believe that Yuan is as much as 50% undervalued (Funke and Rahn, 2005; Sanford, 2005; Chang, 2007).
Thesis: The Chinese Yuan is still undervalued.
Body: 1. Purchasing Power Index 2.The Big Mac Index 3. IMF’s analysis 4. The Manipulation Myth
The Big Mac Index Purchasing Power index is a useful criterion for judging the relative fair values of currencies. Purchasing Power index assumes that under certain circumstances, it cost the exact same amount of a currency to buy another currency and then use the proceeds to buy a market basket of goods as it would cost to use the former currency directly in buying the market basket of goods.
The Big Mac Index is invented by the journal The Economist as an informal approach to measure the purchasing power parity (PPP) between two currencies. It provides a test for judging the extent to which market exchange rates result in goods costing the same in different countries.
According to International Monetary Fund, the Chinese Yuan is “moderately undervalued”. The IMF previously described the Chinese exchange rate as “substantially undervalued”, then in a report released by the IMF, renminbi’s appreciation in recent years showed that it was closer to fair value. The US government complains a lot about that an undervalued renminbi is keeping China’s exports superficially cheap and thus cause job losses in the U.S., Japan and other Asian economies. China’s merchandise exports increased from about 10 billion US dollars per year in the late 1970s to 326 billion dollars in 2002. This amounts to about five percent of total world exports, thus making it the sixth largest trading nation in the world. There is also a myth assuming that the central government of China engages in a currency manipulation. According to this myth, many assert the devaluation of the Yuan by the People’s Bank of China serves as the major cause of declines in the global equity markets, and thus have influences upon world trade flows. Opinions against this myth argue that currency devaluation is a common exercise of sovereign monetary policy and the long-term movements in nominal exchange rates often have nothing to do with the long-term international trade flows or jobs in the United States.
Conclusion: Based on Purchasing Power Index and the Big Mac Index, the Chinese Yuan is undervalued.
References:
Editor, “The Big Mac Index Shows the Chinese Yuan is Still Undervalued”, The Economist, January 7, 2010.
Funke, Michael, and George Rahn, “Just How Undervalued in Chinese Renminbi?” World Economy, 2005, 465-489.
Goh, Ming He, and Yoonbai Kim, “Is the Chinese Renminbi Undervalued?” Contemporary Economic Policy, 2006 (1), 116-126.
Tatom, John, “Is the Chinese Renminbi Undervalued?” MPRA Working paper #17776, Indiana State University, 2007.
Related Websites:
http://www.cnn.com/2012/07/25/business/china-imf-rmb/index.html
https://www.dailyfx.com/forex/market_alert/2015/08/15/Chinese-Yuan-Still-Undervalued-According-to-Purchasing-Power-Parity.html
https://www.wsj.com/articles/the-myths-of-chinas-currency-manipulation-1452296887
https://www.wsj.com/articles/yuan-devaluation-enters-debate-on-whether-currency-is-undervalued-1439307298
https://www.washingtonpost.com/business/economy/chinas-yuan-moderately-undervalued-says-imfs-lipton/2012/06/08/gJQAF4zjOV_story.html
