US: RMB Exchange Rate Is Very Reasonable

The World Bank (Market Area) released the latest purchasing power parity (PPP) GDP data on April 30. Peterson Institute, a top US think-tank, said that this series of data shows that the RMB exchange rate is no longer underestimated, and may even be overestimated.

We have a rather surprising answer: maybe not at all. We can confidently say that the valuation of the RMB is not fair now. In 2005, the RMB was undervalued by 30%, and since then, the RMB has begun to appreciate significantly. This change marks the end of the era of China's economic strategy of artificially controlling the value of the RMB and adopting mercantilism (relying on exports to increase national wealth).

The logic of using the PPP method is based on a simple price income positive correlation, which is the so-called Balassa Samuelson effect - that is, for poor countries, the prices of non trade goods and services will be low, so the overall price level will also be low. In this case, social resources flow into tradable sectors, so the low price level will also be reflected in the low exchange rate. This relationship is so stable that this theory provides a benchmark: at a fixed income level, we can infer the price level and the balanced exchange rate level. If the exchange rate is lower than this rate, it is called undervaluation; if it is higher than this rate, it is the opposite.

To prove our point, we determine the benchmark exchange rate in two ways: assuming per capita gross domestic product Linear relationship with price, using linear regression; Assume that poorer countries and emerging market The relationship between national income and price is weak, and quadratic regression is used.

We used two economic samples and conducted four groups (2 * 2) of tests on two models and two samples (linear and quadratic) with a skeptical attitude. Because inherent errors are inevitable, trends are more important than data for this group of tests.

From the results, for China, the RMB was only slightly undervalued in 2011, about 1.7%. If the quadratic model is adopted, it may even be overestimated.

If the same method is used for 2005, the currency value is underestimated by 28% on average. In other words, China's current account surplus rose from 6% of the total GDP in 2005 to 10.1% in 2011, and fell to 1.9% in 2011, which is in line with the actual appreciation of 27% of the relative benchmark price.

　　 ICP (World Bank International Comparison Program, PPP GDP Compiling Agency) Data is based on 2011. However, we can still use the data of 2011 to calculate the valuation of RMB in 2014. From the end of 2011 to the end of March 2014, China's per capita GDP grew 13.2% faster than that of the United States. According to the calculation in turn, the RMB should actually appreciate 3.2% against the US dollar. However, according to the data of the Bank for International Settlements, from the end of 2011 to March 2014, the RMB appreciated by about 7% against the US dollar, which means that the remaining 1.7% overvaluation range as of 2011 has been completely covered. Therefore, the valuation of RMB in 2014 is very fair.

This estimate has historical significance - because China has always adhered to its exchange rate policy position in the past, and constantly used large-scale intervention to promote the devaluation of the RMB, on the basis of fair value, China may abandon the export-oriented mercantilist development model in the future. The implication of our estimation is that while the macroeconomic aggregate (such as the current account deficit) continues to develop in the right direction, the potential price fluctuations (and the signs of fluctuations) may stop the flow of resources into the trade industry. Therefore, China proudly continues to readjust its economic structure. In other words, there is room for cautious optimism in China's economy. As potential fundamental problems are solved, there will be no place for imbalance.

We can wait and see the end of Chinese mercantilism and the recovery of other countries in the world.