© Blackwell Publishing Ltd 2005
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Just How Undervalued is the
Michael Funke and Jörg Rahn
ISALIGNMENT in the Chinese currency, the renminbi, has been the focus
of much recent interest. Since it was devalued in 1994, China’s currency
has been kept at a constant nominal level to the US dollar despite China’s rapid
economic growth, rising productivity, vibrant exports and massive foreign direct
investment inﬂows – all factors that normally cause a currency to appreciate.
Moreover, the resulting build-up of central bank foreign reserves in itself is
sufFcient to justify renminbi appreciation.
The US government complains vociferously that an undervalued renminbi is
keeping China’s exports artiFcially cheap and causing job losses in America,
Japan and other Asian economies. Given China’s strength as a trading nation, the
fear is that China has achieved exuberant growth by selling deliberately
undervalued exports and transforming itself into the ‘workshop of the world’.
With seemingly inFnite pools of underemployed workers in the countryside and
The authors appreciate helpful comments from Yin-Wong Cheung, Joe Ganley, Marilyne Tolle,
John Williamson, seminar participants at the
Annual Meeting of the
Money, Macro and Finance
in London (London, September 2004), participants at the conference
Reform of Exchange
Rate Regime: International Experience and China’s Selection
(Beijing, September 2004), and an
anonymous referee. They are indebted to the Hong Kong Institute for Monetary Research (see
www.hkimr.org) for assistance in data compilation. A previous version of the paper has been
published as a Bank of ±inland discussion paper (see http://www.bof.F/boFt/Fn/6dp/04abs/pdf/
dp1404.pdf). The Fndings, interpretations and conclusions expressed in this paper are entirely those
of the authors, and do not necessarily represent the view of the Bank of ±inland.
China’s currency is generally known as the renminbi, but the unit of measurement is the yuan
(terminology that parallels ‘sterling’ and ‘pound’ in the UK).
China’s merchandise exports increased from about US$10 billion per annum in the late 1970s to
US$326 billion in 2002, or about Fve per cent of total world exports – making it the sixth largest
trading nation in the world. This article is not intended to be a comprehensive review of this debate.
±or a brief summary, see ‘China is Becoming the World’s Manufacturing Powerhouse’, World
Transition Newsletter About Reforming Economies
, available at http://www.worldbank.org/