Appreciating the Renminbi

Rodney Tyers and Iain Bain ()

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 growth stems from improvements in traded sector productivity that cause wages and non-traded prices to rise. Yet, while evidence on China’s productivity and prices supports this hypothesis, its real exchange rate has as yet shown no long run tendency to appreciate. The use of a global numerical model allows extensions of the hypothesis, including failures of the law of one price for tradable goods, which point to WTO accession trade reforms and China’s high saving rate as key depreciating forces since the late 1990s. The same model is then applied to the implications of premature RMB appreciation. It is shown that, unless this is achieved in association with the repatriation of foreign reserves, which would require thus far unavailable financial depth in the Chinese economy, unilateral RMB appreciation would be destructive of both Chinese and global interests.

JEL-codes: C68 C53 E27 F21 F43 F47 O11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna and nep-mac
Date: 2007-07
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Related works:
Working Paper: Appreciating the Renminbi (2007)
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