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Funke e Rahn - Just How Undervalued is the Chinese Renminbi

Funke e Rahn - Just How Undervalued is the Chinese Renminbi...

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© Blackwell Publishing Ltd 2005 © Blackwell Publishing Ltd 2005, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA 465 Just How Undervalued is the Chinese Renminbi? Michael Funke and Jörg Rahn Hamburg University 1. INTRODUCTION M 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. 1 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’. 2 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 Group 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. 1 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). 2 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 Bank, Transition Newsletter About Reforming Economies , available at http://www.worldbank.org/ transitionnewsletter/octnovdec02/pgs4-6.htm.
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466 MICHAEL FUNKE AND JÖRG RAHN © Blackwell Publishing Ltd 2005 in inef±cient state-owned enterprises, as well as pitifully low wages, China looks like it should be able to out-compete other economies in almost any category of manufacturing with signi±cant labour inputs. The response of politicians in
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