China’s Real Exchange Rate

Rodney Tyers and Jane Golley ()

ANUCBE School of Economics Working Papers from Australian National University, College of Business and Economics, School of Economics

Abstract: International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with a real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis under which economic growth, stemming from improvements in traded sector productivity, causes non-traded prices to rise. More generally, real depreciations can stem from non-traded productivity improvements or, in association with failures of the law of one price for traded goods, labour supply growth and growth-related demand switches due to changes in the saving rate, trade distortions or investment risk premia. This chapter examines the sensitivity of China’s real exchange rate to these determinants. The results confirm that financial capital inflows are a dominant appreciating force in the short run, helping to explain why it is the surplus of Chinese domestic saving over its investment that has restrained the real exchange rate from appreciating during the past decade. In the long term, the appreciating effect of the inevitable fall in the saving rate is likely to be at least partially offset by the depreciating effects of skill acquisition and services productivity growth. Indeed, if future Chinese growth is propelled by these factors, a long term real depreciating trend could be in store.

JEL-codes: C68 C53 E27 F21 F43 F47 J11 J13 J26 O11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cna, nep-dev, nep-mac and nep-tra
Date: 2007-05
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