Is the Chinese Renminbi Undervalued? An Examination of the B-S Effect Using Diverse Datasets

ZHOU Ke

Associate Professor, School of Economics, Southwest University for Nationalities, Sichuan
Abstract: In 2010, the debate over valuation of the Renminbi is again heating up and the Chinese currency has returned to appreciating against the dollar. But is the Renminbi undervalued? Drawing on
the Balassa-Samuelson (B-S) effect on purchasing power parity, we conduct theoretical and empirical analyses of this issue. Theoretical analysis proves that a country’s real exchange rate will appreciate with rising income, but the currencies of low-income countries tend to be undervalued. In order to avoid biased conclusions resulting from a single dataset or sampling method, we draw on three major publicly-available datasets to examine the B-S effect across 144 economies. Our results indicate that the degree of Renminbi misvaluation is highly dependent on the data source. Synthesizing analyses of diverse datasets, we estimate that the Renminbi was only undervalued by less than 8 per cent in 2009. We conclude that China’s external imbalance most probably results from deep-seated structural imbalances rather than Renminbi undervaluation.

Key words: Renminbi, purchasing power parity, Balassa-Samuelson Effect, misalignment

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