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A Resurgent Chinese Yuan Undervaluation and its International Trade Competitiveness

By
Jothee Sinnakkannu*
And

M.K.V Nair**

Abstract

This study analyzed the over-or-undervaluation of the Chinese Yuan (renminbi) against the USD, JPY and EUR
using relative PPP method. We found that the Yuan is undervalued in its real terms against the USD by 21.3 %
and against the EUR by 17.4% between July 2005 and June 2010. We used the export growth and the world
exports share methods to determine China‟s international trade competitiveness during the similar period of
time. We found that the heavily managed Yuan has not altered China‟s international trade competitiveness after
its de-pegging. We imply the findings that China has been protective by involving in large-scale one-direction
intervention in the foreign exchange market, which is in contrary to Article IV of IMF.
===============================================================
Keywords: De-pegging, International trade competitiveness, currency over-or-undervaluation,
relative PPP theory.

JEL Classification: E58 F31 G18

*Jothee Sinnakkannu ** MKV Nair


Senior Lecturer in Finance National Sales Manager
Monash University Sunway Campus Bank of South Pacific Limited
Jalan Lagoon Selatan P.O Box 78, Port Moresby NCD
46150 Bandar Sunway, Selangor, Malaysia Papua New Guinea
Phone: (+603) 5514 6297 Phone: (675) 322 9744
Fax: (+603) 5514 6326 Fax: (675) 321 1954
E-mail: jothee.sinnakkannu@buseco.monash.edu.my E-mail: mknair@bsp.com.pg

About the Authors

*Jothee Sinnakkannu PhD is a Senior Lecturer and Coordinator of Accounting and Finance discipline in the
School of Business, Monash University Sunway Campus Malaysia. He holds a MBA and a PhD in Finance from
University Putra Malaysia. He has over 17 years of teaching experience in the area of Finance and Banking. His
areas of research expertise are in Foreign Exchange Risk Management, Capital Market Behavior and Islamic
Financial Economy. He has published some of his research work in leading international journals.

**MKV Nair is currently the National Sales Manager of Bank of South Pacific (BSP) in Papua New Guinea. He
has extensive experience in Insurance, banking and finance for over 26 years and has worked in Singapore and
Australia in senior positions in the banks. In BSP, Nair is in charge of Sales, Marketing, Business Development,
Collections, Training & Compliance and Western Union money transfer. With two master‟s qualifications in
hand, currently MKV Nair intends to pursue his PhD in Banking and Finance through Monash University,
Malaysia.

Electronic copy available at: http://ssrn.com/abstract=1717254


A Resurgent Chinese Yuan Undervaluation and its International Trade Competitiveness

I. Introduction

The Chinese Yuan or renminbi (RMB) and the US dollar (USD) exchange rate were pegged

for over a decade since 1994 at RMB8.28/USD. On 21st July 2005, the People‟s Bank of

China (PBOC) announced a revaluation of its currency and to reform the exchange rate

regime. The RMB/USD pegged exchange rate regime attracted little criticism during its early

period in the 90‟s. Indeed, it was widely viewed as contributing to internal and external

economic stability. China‟s economy had experienced a dramatic growth under this pegged

exchange rate system since 1995. Its average gross domestic product (GDP) had been about

9.0 % per annum while 3.3 % in the US and 2.2 % in the European Union (EU). China‟s

annual exports increased from USD121 billion in 1994 to USD762 billion in 2005 and to

USD 1.43 trillion in 2008. This phenomenal increase in China‟s exports were largely

attributed to the pegged regime during the 90‟s and early 2000, but the continuous increase of

its exports even after the RMB/USD de-pegging in 2005 raises issues on the evolution of the

RMB and its value in real terms against the USD.

Since 2003, the widening trade imbalance between US and China (which totaled to USD202

billion or 6.5 percent of US GDP in 2005) has lead to disputes against RMB/USD peg system.

There has been mounting external and internal pressure on China to de-peg the RMB and to

appreciate against the USD since 2002. The pressure to de-peg RMB came from both, the

foreign countries which were feeling that China has been enjoying unfair international trade

competitiveness and the local export businessmen who were feeling that their exports are

undervalued in terms of foreign currency, especially the USD. There was a widespread view

Electronic copy available at: http://ssrn.com/abstract=1717254


that the RMB was significantly undervalued in real terms against the USD before July 2005,

with some arguing that this is a matter of global concern. Many studies have estimated the

equilibrium exchange rate of RMB/USD using different theoretical frameworks. Most of

them concluded that the RMB was significantly undervalued in real terms against the USD by

15 to 30 % before its de-pegging.

Along these lines, the Chinese pegged exchange rate regime was held responsible for the

deindustrialization of the US economy and the widening trade imbalance between China and

the US. The continued rise in the US-China trade imbalance, complaints from US

manufacturers over the competitive challenges posed by cheap Chinese imports, and concerns

that US manufacturing jobs are being lost due to unfair Chinese trade practices have led

several US Congress members to call on the Bush administration to take a more aggressive

stance against certain Chinese trade policies deemed to be unfair. For example, some US

Congress members argued that China manipulates its currency with the USD to make its

exports cheaper, and imports more expensive, than they would be under a floating currency

exchange rate system.

The US demanded at least a 20 % appreciation of RMB against the USD and threatened

China with protectionist measures before RMB/USD de-pegging in July 2005. The PBOC

adjusted its RMB just by 2.1 % on July 21, 2005 and also announced that the Chinese

currency would be anchored to a currency basket (US dollar, euro, won and yen), without

defining the weights attached to each of these currencies. The PBOC‟s announcement to de-

peg its RMB/USD exchange rate lowered the external pressure and showed its commitment in

Electronic copy available at: http://ssrn.com/abstract=1717254


modifying its currency exchange rate strategy, while underlining it would keep its freedom of

choice.

Since de-pegging, the RMB was allowed to appreciate slowly against the USD in nominal

terms. Figure 1 illustrates that the RMB has appreciated by 5 % in November 2006, by 10 %

in October 2007 and to the US desired level of 20 % in June 2008. For over two years since

the RMB/USD exchange rate reached the US desired level of 20 % appreciation, this Chinese

currency is managed to hover around that exchange rate level like another pegged regime.

Figure 1: RMB-USDAppreciation since July 2005 to Sept 2010

Source: Authors creation based on CEIC data

This indicates that, China‟s managed float exchange rate arrangement has not gone far and

implies no adverse impact on its surging trade surplus and foreign reserve accumulation.

China‟s foreign reserves continued to increase. As indicated in Table 1, China‟s foreign

exchange reserves have increased sharply in recent years, both in absolute terms and as a

percent of its GDP. These rose from USD819 billion in 2005 to USD1.946 trillion in 2008

and to USD2.5 trillion by June 2010. China‟s foreign reserves as a percent of GDP grew from

36.5 % in 2005 to 47 % in December 2009, which is superficially high level for a large

economy which is still in a developing stage. In 2008, China‟s trade surplus in manufactures

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increased by USD131 billion to USD581 billion, while the China‟s Central Bank purchases

were about USD600 billion. This is wildly beyond precedent for anything that has happened

over the past 60 years. This implies that China has intervened heavily in the foreign exchange

market to limit the appreciation of its RMB, especially against the USD under the managed

exchange rate regime.

Table 1: China’s Foreign Reserves Accumulation, 2001 to June 2010


Year USD Billions % of China's GDP
Dec-01 215.60 16.3
Dec-02 291.10 20.0
Dec-03 403.25 24.6
Dec-04 609.93 31.6
Dec-05 818.87 36.5
Dec-06 1,068.50 40.2
Dec-07 1,528.25 45.2
Dec-08 1,946.03 45.0
Dec-09 2,399.15 47.4
June-10 2,454.28 NA
Source: Global Insight and Chinese State Administration of Foreign Exchange

This appears to be a resurgent of the Chinese Yuan undervaluation as it was before the de-

pegging. This condition also raises a question whether the RMB is being fairly managed

according to the foreign exchange market forces after its de-pegging exercise. As previous

research findings indicated that the RMB was significantly undervalued against the USD in

real terms before July 2005, the de-pegging supposes to have corrected it. It is therefore

important to deepen the concept of currency undervaluation and to define equilibrium

exchange rate norm accurately. There was no clear statement on how the heavily managed

float would evolve after the RMB/USD de-pegging. Is the RMB continued to be undervalued

and, if so, by how much? Over the last few years, there have been several papers discussing

the possible undervaluation of the RMB and many of them try to calculate by how much the

RMB was undervalued against the USD. What are the after effects of the RMB/USD de-

pegging on China‟s international trade competitiveness? These are some of the investigative

questions addressed in this paper.

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The next sections of this paper are structured as follows. Section II has an overview on

previous literature on RMB undervaluation. Section III provides the research objectives of

this paper. Section IV discusses the research design, data and methodology used in this

research. Section V presents the empirical findings while section VI highlights the

implications of the findings. Section VII summarizes the conclusions.

II. Relevant Literature Review

Goldstein M. (2004) documented that the RMB was significantly undervalued by about 15 to

25 percent against the USD before July 2005. He had used the “underlying balance approach”

and “adjustment of global payment imbalances approach” to measure the equilibrium

exchange rate of RMB/USD. Frankel J. (2004), using a modified purchasing power parity

approach, concluded that the RMB was undervalued by approximately 35 percent against the

USD in 2000. In contrast, Wang (2004) finds that it is difficult to arrive at any firm and robust

conclusion about the equilibrium level of the RMB/USD using a variety of existing

techniques. Funke and Rahn (2004) have argued that the US government complained that an

undervalued RMB is keeping China‟s exports artificially 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‟. China‟s merchandise exports

increased from USD10 billion per annum in the late 1970s to USD326 billion per annum in

2002, or about five per cent of total world exports making it the sixth largest trading nation in

the world (Ernest H, 2002). Funke and Rahn (2004) have pointed that with seemingly infinite

pools of underemployed workers in the countryside and inefficient state-owned enterprises, as

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well as low standard of living, China could not be able to out-compete other economies in

almost any category of manufacturing with significant labor inputs. Sarno and Taylor (2002)

has argued that China‟s global current account surplus was under 3 percent of GDP in 2002

and declined to 1.8 percent in the first half of 2003.

Most of the extant studies fall into some familiar categories, either relying upon some

form of relative purchasing power parity (PPP), the cost competitiveness calculation, the

modeling of deviations from absolute PPP, a composite model incorporating several

channels of effects (sometimes called behavioral equilibrium exchange rate models), or

flow equilibrium models. The relative PPP comparisons are the easiest to make, in terms

of numerical calculation. O n the other hand, relative PPP is uninformative about how a

country‟s exchange rate stands relative to others. Bosworth (2 0 0 4 ), Frankel (2 0 0 5 ),

Coudert and Couharde (2 0 0 5 ), and Cairns (2 0 0 5 ) estimated the relationship between

deviation from absolute PPP and relative per capita income. All obtain similar results

regarding the relationship between the two variables (although Coudert and Couharde

fail to detect this link for the RMB in their time series analysis).

Zhang (2 0 0 1 ), Wang (2 0 0 4 ), and Funke and Rahn (2 0 0 5 ) implement ed what could

broadly be described as behavioral equilibrium exchange rate (BEER) specifications.

These models incorporate a variety of channels through which the real exchange rate is

affected. Since each author selected different variables, the implied misalignments will

necessarily vary. Besides that, these approaches failed to identify if a currency is

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misaligned relative to another country‟s for the same reason that relative PPP fails to do

so because they typically rely upon price indices and not actual prices.

O ther approaches center on the flow equilibrium, considering savings and investment

behavior and the resulting implied current account balances. The equilibrium exchange

rate is derived from the implied medium term current account using import and export

elasticity. In the IMF‟s “macroeconomic approach”, the norms are estimated in the

spirit of Chinn and Prasad (2 0 0 3 ). Wang (2 0 0 4 ) discussed the difficulties in using this

approach for China but did not present estimates of misalignment based upon this

framework. Coudert and Couharde (2 0 0 5 ) implement a similar approach. Finally, the

external balances approach relies upon assessments of the persistent components of the

balance of payments condition (Goldstein, 20 0 4 ; Bosworth, 2 0 0 4 ). This last set of

approaches is perhaps most useful for conducting short-term analyses. But the wide

dispersion in implied misalignments reflects the difficulties in making judgments about

what constitutes persistent capital flows. For instance, Prasad and Wei (2 0 0 5 ),

examining the composition of capital inflows into and out of China, argued that much of

the reserve accumulation that has occurred in recent years is due to speculative inflows;

hence, the actual degree of misalignment is small. In his survey, Cairns (2 0 0 5 ) observed

that studies implementing an absolute PPP methodology result in the greatest degree of

estimated undervaluation. Those implementing either relative PPP or flow equilibrium

approaches find smaller estimates of undervaluation.

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III. Research Objectives

Most of the previous studies have confined its attention in estimating the RMB/ USD

undervaluation prior to the RMB de-pegging. Very little was done to investigate the

RMB‟s value after its de-pegging. Specifically this study could be one of the first to study

the RMB/ USD equilibrium path and its effect on China‟s international trade

competitiveness after July 2 0 0 5 . This paper attempts to fill the gap in empirical

literature on this issue. Therefore the main objective of this study is to determine the

RMB‟s over-or-undervaluation against the USD and two other major currencies after July

2005. Along with this objective, this study is also ambitious to determine the effect of

RMB/USD de-pegging on China‟s international trade competitiveness. Specifically, to

analyze on the trade imbalance between China and its major trading partners after the de-

pegging exercise on July 2005.

IV. Research Design, Data and Methodology

Research Design

The first issue in this study is to empirically determine the actual over-or-undervaluation of

the RMB against the USD, Japanese Yen (JPY) and the Euro (EUR) between January 2005

and June 2010. For the purpose of this study, we used the real exchange rate misalignment

approach to determine by how many percent the RMB was under-or-overvalued against USD,

JPY and the EUR, six months before and four years after the RMB/USD de-pegging. The

second issue of this study is to determine whether the de-pegging of RMB/USD has altered

the trade competitiveness of China against US, Japan and the European Union. To determine

China‟s international trade competitiveness, we used the country‟s share of world exports

method. Many academic studies have used this method to demonstrate the rise in China's

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international competitiveness. Adams et al. (2006) used the rise in China's share of world

exports as one of their key indicators to highlight the rise of China's international

competitiveness. Holst and Weiss (2004) have used this approach to demonstrate that ASEAN

economies were suffering a substantial and widespread loss of market share in the US and

Japanese markets due to the rise of China's exports. Similarly, Lall and Albaladejo (2004) also

using this method found that China's rise in international competitiveness has primarily

threatened the low technology sectors of its East Asian neighbors.

Data

There are two types of secondary data used in this study to measure the RMB‟s nominal and

real exchange rates. The first type is the monthly spot exchange rates of RMB against USD,

JPY and the EUR between January 2005 and June 2010. For the purpose of this study, the

average monthly exchange rates were used. The average monthly exchange rates of the said

currencies were obtained from an international exchange rate web site: www.oanda.com. The

second type of data collected is the monthly consumer price index (CPI) of the said countries

for the same period of time. The relevant data of China‟s CPI were obtained from the Chinese

government website http://www.stats.gov.cn. The statistics on the CPI of Japan, US and

European Union (EU) were obtained from the respective country‟s Central Banks and the

CEIC database for national statistics at www.ceicdata.com. The CPI of China, US, Japan and

the EU from January 2005 to June 2010 are illustrated in Appendix A. To determine China‟s

international trade competitiveness, the annual export values of China, US, Germany, Japan

and other countries were obtained from CEIC database. There are other secondary data

sources also used in this research, such as internet journals, newspapers, magazines and books

etc.

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Methodology

Relative PPP method provides the fundamental framework in determining the over-or-

undervaluation of the RMB against USD, JPY and EUR. The real exchange rate is

calculated by adjusting the nominal exchange rate with the inflation differences of the

relevant pair of countries. The percentage change in the monthly CPI of each country in

analysis indicates the inflation rates. This is done through the following equation:

* St = St (1 + πf,t) / (1+ πh,t) (1)

where:

*St is the real exchange rate at time t,


St is the nominal exchange rate at time t,
πf,t is the inflation rate in relative foreign country at time t, and
πh,t is the inflation rate in home country at time t.

Once the real exchange rate is determined, the difference between the nominal exchange rate

and real exchange rate is established by subtracting the real exchange rate from nominal

exchange rate. A negative difference would mean that the home currency is undervalued

while a positive difference would mean otherwise. However the general rule of PPP holding is

that, the currency of the country with higher inflation rate should devalue against the currency

of the country with lower inflation rate in proportionate to the relative difference in inflation

rates. Therefore the percentage rate of over-or-undervaluation needed to be calculated. This

can be established through:

Vt = (*St –St /St) 100 (2)

where:

Vt is the percentage over-or-under valuation at time t,


St is the nominal exchange rate at time t,
*St is the real exchange rate at time t.

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As the RMB‟s over-or-undervaluation against three other currencies is determined, the study

further analyses China‟s international trade competitiveness to establish a link between

currency valuation and international trade competitiveness. The measure of China‟s

international trade competitiveness was determined in two ways. Firstly the average annual

growth in exports of China was compared with three other countries; Germany, US and Japan

from 1992 to 2005 and between 2005 and 2008. Secondly, the annual export share of nine top

exporting countries was calculated as a percentage against the total world export value in

1992, 2005 and 2008. The changes in the export share from 1992 to 2005 and from 2005 to

2008 of a country indicate the strength or weakness in the country‟s international trade

competitiveness.

V. Empirical Finding

Findings on the RMB‟s over-or-undervaluation against the USD, JPY and the Euro

The first empirical issue in this study is to measure by how much the RMB was under-or-

overvalued just before the de-pegging and how it has moved after the de-pegging? This study

assumes that the relative PPP between China and three other countries in analysis is holding.

Based on the relative PPP theory, the higher inflation country should be devaluing the home

currency against the currency of lower inflation country. Table 2 summarizes the findings on

the percentage over-or-undervaluation of RMB against USD, JPY and EUR from the firts half

of 2005 to the first half of 2010.

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Table 2: The Overvaluation (+) and Undervaluation (-) of RMB against
USD, JPY and EUR in %
Year RMB/USD Stdev RMB/JPY Stdev RMB/EUR Stdev
H1/2005 -17.57% 0.86 +3.02% 0.83 -13.57% 0.89
H2/2005 -19.40% 0.85 +2.20% 0.48 -15.09% 0.53
2006 -21.06% 0.81 +2.08% 0.64 -16.26% 0.61
2007 -20.86% 0.75 +5.17% 1.37 -15.44% 0.81
2008 -22.85% 2.07 +4.98% 2.92 -17.27% 2.43
2009 -24.68% 2.76 -0.21% 1.45 -22.75% 0.88
H1/2010 -22.46% 0.07 +3.85% 0.50 -21.08% 0.29
Overall -21.27% 1.17 +3.01% 1.17 -17.35% 0.92
Note: H1 indicates first half of the year, H2 indicates second half of the year.
Stdev indicates standard deviation
Source: Author‟s calculations based on CEIC data

The RMB was found to be undervalued by an average of 17.6 % against the USD in the first

six months of 2005 (just before de-pegging in July 2005). The findings reported in table 2

indicate that the RMB is continuously being undervalued against the USD even after the de-

pegging by an average of 21.3 % with a standard deviation of 1.17 %. Though the nominal

exchange rate of RMB/USD has slowly increased (see figure1) since its de-pegging and

reached the expected level of 20 percent in August 2008, the real exchange rate of this pair of

currency is continuously found to be undervalued. The low standard deviation in the

undervaluation of RMB/USD indicates low volatility of the exchange rate. The RMB/USD

nominal exchange rates, real exchange rates and the percentage undervaluation from January

2005 to June 2010 are tabulated in table 1 in Appendix B. Figure 2 illustrates that, the

nominal exchange rate of RMB/USD is higher than real exchange rate throughout the period

of observation indicating the RMB‟s undervaluation. This indicates that the USD is buying

more RMB in nominal terms than what it should be in real terms. Although the nominal

exchange rate of RMB/USD has been appreciating over these four years after it‟s de-pegging,

the real exchange rate is found to be following almost a parallel path of this change but being

continuously under-valued.

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Figure 2: RMB/USD Nominal and Real Exchange Rates

Source: Author‟s calculations based on CEIC data

Analyzing on how the RMB has moved against the JPY and EUR, provided the records as

illustrated in table 2 and 3 respectively in Appendix B. The RMB was overvalued against the

JPY in the first six months of 2005 by 3.0 %. The de-pegging of the RMB/USD seems to have

no impact on the nominal exchange rate between RMB and JPY. The RMB/JPY was found to

be continuously overvalued throughout the period of analysis (see figure 3). However the gap

difference between the nominal and real exchange rates of this pair of currency slightly

widened since October 2006, but it converged between September 2008 and 2009. As

indicated in table 2, the real exchange rate of RMB/JPY was slightly higher than the nominal

exchange rate by 2.08 % in 2006 while it had moved to 5.17% in 2007, 4.98 % in 2008,

- 0.21% in 2009 and 3.85 % in the first half of 2010. The RMB was overvalued against the

JPY by 3.0 % in the overall period of observation with a standard deviation of 1.17 %.

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Figure 3: RMB/JPY Nominal and Real Exchange Rates

Source: Author‟s calculations based on CEIC data

During the same period the RMB has recorded an undervaluation against the EUR. The RMB

was undervalued by about 14 % against the EUR in the first six months of 2005 (just before

RMB/USD de-pegging). The de-pegging of the RMB/USD did not have any significant

impact on the nominal exchange rate of RMB against the EUR. The RMB was continuously

being undervalued against the EUR throughout the time of analysis by 17.35 % with a

standard deviation of 1.0 percent (see table 2). The gap difference between the RMB and Euro

has been moving in parallel to each other. This is depicted in Figure 4, where the RMB/EUR

exchange rates in nominal terms are higher than its real terms indication RMB‟s

undervaluation.

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Figure 4: RMB/Euro Nominal and Real Exchange Rates

Source: Author‟s calculations based on CEIC data

Findings on China‟s international trade competitiveness

We used the country‟s export growth and its world exports share as a measure to determine

China‟s international trade competitiveness in this study. A country gains (losses)

international competitiveness if its export market share increases (decreases). Table 3

summarizes the percentage annual growth in exports of China, Germany, the US and Japan

from 1992 to 2008. As table 3 illustrates the export growth of China compared to three other

worlds top exporting countries, table 4 illustrates such growth of the same countries

specifically after the RMB/USD de-pegging in July 2005. The findings shows that over the 13

year period ( from 1992 to 2004) China recorded the highest average annual growth of 18.25

% compared to Germany recording 2.85 %, the US recorded 5.37 % while Japan recorded

only 3.19 %. This indicates that the RMB/USD pegged exchange rate regime has well

benefited China in its export growth during the period of analysis. China‟s trade

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competitiveness was very strong as compared with Germany, US and Japan before the

RMB/USD de-pegging. However, what has happened to these average annual growths in

exports among these four countries after the RMB/USD de-pegging is found to be interesting.

As the RMB/USD de-pegging suppose to have move China‟s exports to grow slowly, has

actually not altered its momentum.

Table 3: Annual Exports of China, Germany, US and Japan from 1992 to 2004
Exports Annual Exports of Annual Exports of Annual Exports of Annual
of China Growth Germany Growth US Growth Japan Growth
Year (USD mil) (%) (USD mil) (%) (USD mil) (%) (USD mil) (%)
1992 84,940 NA 841,389 NA 448,163 NA 339,605 NA
1993 91,744 8.01 747,875 -11.11 464,773 3.71 361,511 6.45
1994 121,006 31.90 840,907 12.44 512,627 10.30 395,950 9.53
1995 148,780 22.95 1,024,468 21.83 584,743 14.07 441,548 11.52
1996 151,048 1.52 1,025,211 0.07 625,073 6.90 411,188 -6.88
1997 182,792 21.02 1,002,267 -2.24 689,182 10.26 421,010 2.39
1998 183,712 0.50 1,063,543 6.11 682,138 -1.02 386,891 -8.10
1999 194,931 6.11 542,830 -48.96 695,797 2.00 417,426 7.89
2000 249,203 27.84 549,835 1.29 781,918 12.38 479,297 14.82
2001 266,098 6.78 571,378 3.92 729,100 -6.75 403,275 -15.86
2002 325,596 22.36 616,333 7.87 693,103 -4.94 415,575 3.05
2003 438,228 34.59 752,423 22.08 724,771 4.57 470,525 13.22
2004 593,326 35.39 909,923 20.93 818,520 12.93 565,394 20.16
Average 18.25 2.85 5.37 4.85
Stdev 13.02 19.31 7.02 10.56
Note: An annual export of each country is the total exports to the entire world in the given year. Percentage growth is the year
on year differences in the total exports of a given country. Stdev is the standard deviation in the annual growth percentage. NA
indicates not available.
Source: Authors calculations based on CEIC database inputs.

Table 4: Annual Exports of China, Germany, US and Japan from 2005 to 2008
Exports Annual Exports of Annual Exports of Annual Exports Annual
of China Growth Germany Growth US Growth of Japan Growth
Year (USD mil) (%) (USD mil) (%) (USD mil) (%) (USD mil) (%)
2004 593,326 NA 909,923 NA 818,520 NA 565,394 NA
2005 761,953 28.42 977,154 7.39 907,158 10.83 595,736 5.37
2006 969,380 27.22 1,122,410 14.87 1,038,270 14.45 650,224 9.15
2007 1,217,790 25.63 1,324,096 17.97 1,162,980 12.01 699,439 7.57
2008 1,428,660 17.32 1,450,445 9.54 1,301,110 11.88 788,884 12.79
Average 24.65 12.44 12.29 8.72
Stdev 5.02 4.84 1.53 3.13

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Note: An annual export of each country is the total exports to the entire world in the given year. Percentage growth is the year
on year differences in the total exports of a given country. Stdev is the standard deviation in the annual growth percentage. NA
indicates not available.
Source: Authors calculations based on CEIC database inputs.
Table 4 highlights the percentage annual export growth of China compared to Germany, US

and Japan after the RMB/USD de-pegging (from 2005 to 2008). China‟s average annual

growth from 2005 to 2008 is twice as the growth of Germany and the US while three folds of

Japan‟s exports. This clearly indicates that the RMB/USD de-pegging did not alter China‟s

exports but has made it even stronger than before. This is an indication that the RMB is being

continuously intervened to keep it cheap against the USD.

However, China‟s large global trade imbalance particularly in manufactures, declined

substantially in the first half of 2009, compared to the similar period in 2008. Chinese figures

for trade in manufactures during the first half of 2009 compared with 2008 are presented in

Table 5, for six principle trading partners.

Table 5: Chinese Trade in Manufactures* by Principle Trading Partners (USD billions)


Jan – June 2008 Jan – June 2009 % Change in Balance,
2008 -2009
Partner Exports Imports Balance Exports Imports Balance %
World 629.6 383.6 +246.0 494.2 307.8 +186.4 -24
United States 113.0 33.6 +79.4 94.5 28.1 +66.4 -16
EU 132.3 63.6 +69.0 100.4 55.0 +45.4 -34
India 15.0 2.9 +12.1 12.7 2.1 +10.6 -12
Japan 49.2 71.6 -22.4 40.3 54.6 -14.3 -36
South Korea 32.0 51.3 -19.3 21.3 41.3 -20.0 +4
Taiwan 12.2 53.0 -40.8 7.6 34.3 -26.7 -35
*HS, VI – XXII
Source: China’s Customs Statistics (Monthly Exports & Imports)
Table adopted from (Preeg, 2009)

Based on table 5, the overall distribution of decline in the Chinese surplus among 6 major

trading partners is in sharp contrast. The Chinese surplus was down by only 12 % with India

and 16 % with the United States, well below the global average of 24 %, while the imbalances

were down by 34 to 36 % for the EU, Japan, and Taiwan. And then there is the anomalous 4

18
% increase in the trade deficit with South Korea. This all leads, as do the similarly large

country differentials for the declines in the U.S. deficit, to the question of what will be the

bilateral paths of trade during global economic recovery, to which this presentation now turns,

with a first look at the results for the first three quarters of 2009 presented in Table 6.

Table 6: China’s Trade in Manufactures* by Principle Trading Partners


For First Three Quarters of 2009 ( USD billions)
Quarter Trade United EU India Japan South Taiwan
States Korea
First Quarter Export 44.4 48.6 5.9 19.7 10.4 3.4
Import 12.5 24.6 0.9 23.8 18.2 14.2
Balance +31.9 +24.0 +5.0 -4.1 -7.8 -10.8
Second Quarter Export 50.1 51.8 6.8 19.9 11.9 4.2
Import 15.6 30.2 1.2 30.9 23.1 20.1
Balance +34.5 +21.6 +5.6 -11.0 -11.2 -15.9
Third Quarter Export 59.3 62.2 8.2 23.3 11.6 5.3
Import 17.4 35.1 1.2 35.9 27.4 24.5
Balance +41.9 +27.1 +7.0 -12.6 -15.8 -19.2
*HS, VI – XXII
Source: China’s Customs Statistics (Monthly Exports & Imports)
Table adopted from (Preeg, 2009)

Chinese trade in manufactures during the first three quarters of 2009 showed the beginnings

of a resurgent trade imbalance, centered on a growing Chinese surplus and a growing US

deficit. This is only the first take on the recovery path for trade, and a more definitive picture

will take shape over the next several quarters. At a minimum, however, the January to

September figures should be a wake-up call for the strong likelihood of a return to heavily

export-oriented growth by China (Preeg, 2009).

Table 7 illustrates China‟s competitive performance in terms of its world export share in

percentage. The findings shows that China‟s export share was merely 2.38 % of the world

exports in 1992, ranking it to be the second lowest among nine top exporting countries. As a

result of China‟s high annualized growth in exports (average 18.25 %) from 1992 to 2004, its

world exports share has risen to 7.7 % in 2005 ranking it to be the third largest exporter in the

world just behind US and Germany (surpassing Japan which was the third largest in 1992).

19
This could have been the outcome of its RMB/USD pegging since 1994, which was largely

seen to be undervalued.

Table 7: China’s World Exports Share in 1992, 2005 and 2008 in USD millions
1992 % 2005 % 2008 %
Exports in Export Exports in Export Exports in Export
Country USD millions Share USD millions Share USD millions Share
China 84,940 2.38 761,953 7.74 1,428,660 9.05
Germany 841,389 23.57 977,154 9.92 1,450,445 9.19
US 448,163 12.55 907,158 9.21 1,301,110 8.25
Japan 339,605 9.51 595,736 6.05 788,884 5.00
France 231,451 6.48 436,365 4.43 598,770 3.79
Italy 178,349 5.00 370,644 3.76 540,017 3.42
UK 190,481 5.34 383,220 3.89 458,692 2.91
South Korea 76,632 2.15 284,422 2.89 422,008 2.67
Hong Kong 119,487 3.35 289,510 2.94 363,003 2.30
World 3,569,716 100.00 9,848,878 100.00 15,780,000 100.00
Source: Authors compilation based on CEIC database

However, the RMB/USD de-pegging in July 2005 found to have not altered China‟s trade

competitiveness. Between 2005 and 2008 its annualized growth in exports have been

superficially high at an average of 24.65 % per annum which indeed made China to be the

second largest exporter in the world with 9.05 % exports share surpassing even US and just

being behind Germany. Though the RMB appreciated by about 20 % against the USD since

its de-pegging in July 2005 to June 2008, China‟s export growth continued to increase relating

to the issue of currency misalignment that centers on the greatly undervalued RMB and its

relationship to the USD in real terms.

VI. Implications

This paper highlights the direct and indirect evidences that the Chinese RMB is being

continuously undervalued against the USD and EUR in real terms. The direct evidence is that,

the relative PPP measure on real exchange rate values of RMB/USD and RMB/EUR found to

20
be lower that the nominal exchange rate from January 2005 to June 2009. This indicates that

the RMB remains undervalued even after the de-pegging exercise in July 2005 implying the

USD and EUR buying more RMB in nominal terms then what it should be in real terms. This

also implies that the PBOC has strongly intervened (through its huge foreign exchange

reserves) in the foreign exchange market to keep the RMB undervalued against the USD and

EUR. The RMB/USD de-pegging seems to have not met its objective as required by the US

authorities. The continuous undervaluation of RMB is the fundamental reason for the large

trade imbalance between China and the US especially in the manufactures which have caused

less production and jobs in the western countries specifically in the US. Though the global

financial crisis reduced the trade imbalance in 2008, the resurgent of widening trade

imbalance particularly in the manufactures between China and the US is a concern. Looking

ahead, the big question is to what extent the trade imbalances will continue to grow as global

economic recovery gathers momentum. There will probably be some further increases in the

Chinese surplus and the U.S. deficit as both exports and imports grow much faster than GDP.

The continued increase in the trade imbalance (mainly for the manufactures) is highly likely

in future years unless more forceful policy actions are taken by the Obama administration.

Recently, the Chinese authorities, most prominently Premier Wen Jiabao have asserted that

countries have the fundamental right to determine their own exchange rate. They may listen

politely to what other authorities including the International Monetary Fund (IMF) say on the

subject, but as a matter of national sovereignty the Chinese government claim that they have

the unilateral authority to determine their exchange rate. However, Article IV of the IMF

states that members should “avoid manipulating exchange rates in order to gain an unfair

competitive advantage over other members,” and the related surveillance provision defines

21
manipulation to include “protected large-scale one direction intervention in the foreign

exchange market”. In other words, if a US trading partner such as China, makes protected

large-scale purchases of USD and other currencies (that is, one-direction intervention) that

leads to a lower-than-market-based exchange rate and a larger-than-market-determined trade

surplus, there is prima facie evidence of IMF prescribed exchange rate manipulation to gain

an unfair competitive advantage (Preeg, 2003).

The findings of this study implicates that the Chinese government have been going against the

IMF Article IV prescription. We find that the RMB has been intervened to be undervalued in

one-direction at a lower-than-market based exchange rate. The main objective of de-pegging

the RMB/USD was to have the Chinese currency to float and be at the equilibrium set by the

exchange market forces. No doubt that many sovereign countries intervene in the foreign

exchange market to manage their exchange rates within a band that deemed appropriate. This

is the fundamental operation of managed float regime which is also known as “dirty float”.

When currencies are managed to be exchanged in a predetermined band of movement, the

interventions are not deemed manipulative. However, when a currency is intervened in large-

scale to be undervalued in one-direction, certainly based on the IMF prescriptions; it can be

implicated as manipulative.

The indirect evidence derived by this study is that, China‟s superficial growth in its exports

and its growth in the world exports share specifically between 2005 and 2008. China‟s exports

to the world increased at an annualized average of 24.65 percent (while Germany and the US

grew at half of this phase) between 2005 and 2008. Corresponding to this China‟s share of

world exports have increased from 7.7 percent in 2005 to 9.05 percent in 2008, while

22
Germany, the US and Japan dropped by 0.73, 0.96 and 1.05 percent respectively during the

same period of time. This phenomenal increase in China‟s exports to the world (especially,

even after the RMB/USD de-pegging) implicates that the RMB‟s undervaluation has continue

to create an undue advantage to China‟s trade competitiveness.

The rise of China‟s exports has disproportionately been in high-technology industries. Where

fifteen years ago China was specialized in the exports of low-tech products such as apparel,

toys and footwear, today it has become a key exporter of high-technology manufactures. This

has raised concerns that China is rapidly moving up the technology ladder and becoming

competitive in industries that have traditionally been comparative advantage sectors for

Western economies (Van Assche et al, 2008). This implies that China has taken advantage

over its undervalued exchange rate to shift its production from low-tech products to high-tech

products which creates a competitive position in the global market. This shift has made

China‟s exports to have higher value to a given volume of exports.

VII. Conclusion

This study concludes that, the escalating accumulation of foreign reserves annually, the large

purchase of foreign currencies (especially the USD) by PBOC and the phenomenal increase in

China‟s exports are the indications that the RMB is continuously being undervalued against

the major international currency; the USD. The 2008 financial crisis has made this situation

worst off for the industrialized nations in terms of their exports while China has been at

advantage of its undervalued currency. Though we do not have the data of China‟s daily

interventions in the foreign exchange market, we can clearly imply that the findings of this

study show that China has been protectively manipulating its currency in one-direction to

23
keep its RMB undervalued. Hence, China‟s decision to de-peg and allowing it to float by

managing it with a basket of currencies has not gone far in its required objectives. The

governments of countries which felt disadvantaged by China‟s large-scale one-direction

intervention in its foreign exchange market should sanction decisive actions against China to

stop this intervention and let the market forces to determine the RMB value to achieve a

balanced global economic stability. The United States and the G-20 need to review and revise

the policy framework for balanced and sustainable growth. Certainly the issue of currency

misalignment, centered on the undervalued RMB, needs urgent attention.

24
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26
APPENDIX A

CPI of China, US, Japan and EU between January 2005 and June 2009 (1996=100)
Month China US Japan Euro Zone
Jan-05 101.9 123.7 99.6 117.8
Feb-05 103.9 123.8 99.4 118.1
Mar-05 102.7 123.9 99.3 118.3
Apr-05 101.8 124.3 99.1 118.5
May-05 101.8 124.8 99.2 118.7
Jun-05 101.6 124.0 99.1 118.7
Jul-05 101.8 124.6 99.0 118.6
Aug-05 101.3 125.2 99.1 118.9
Sep-05 100.9 126.7 99.4 119.5
Oct-05 101.2 127.0 99.4 119.8
Nov-05 101.3 126.0 99.0 119.5
Dec-05 101.6 125.0 99.1 119.9
Jan-06 101.9 126.4 99.2 119.4
Feb-06 100.9 126.7 98.2 119.7
Mar-06 100.8 127.4 99.1 120.4
Apr-06 101.2 128.5 99.3 121.2
May-06 101.4 129.1 99.6 121.5
Jun-06 101.5 129.4 99.6 121.6
Jul-06 101.0 129.7 99.3 121.5
Aug-06 101.3 130.0 100.0 121.6
Sep-06 101.5 129.4 100.0 121.6
Oct-06 101.4 128.7 99.8 121.7
Nov-06 101.9 128.5 99.3 121.7
Dec-06 102.8 128.7 99.4 122.2
Jan-07 102.2 129.1 99.2 121.6
Feb-07 102.7 129.7 98.7 121.9
Mar-07 103.3 130.9 99.0 122.7
Apr-07 103.0 131.8 99.3 123.5
May-07 103.4 132.6 99.6 123.8
Jun-07 104.4 132.8 99.4 123.9
Jul-07 104.4 132.8 99.3 123.6
Aug-07 106.5 132.6 99.8 123.7
Sep-07 106.2 132.9 99.8 124.2
Oct-07 106.5 133.2 100.1 124.8
Nov-07 106.9 134.0 99.9 125.5
Dec-07 106.5 133.9 100.1 126.0
Sources: CEIC, China National Statistics website and Thomson Reuters

27
APPENDIX A (Continued)

CPI of China, US, Japan and EU between January 2005 and June 2009 (1996=100)
Month China US Japan Euro Zone
Jan-08 107.1 134.6 99.9 125.5
Feb-08 108.7 135.0 99.7 125.9
Mar-08 108.3 136.1 100.2 127.1
Apr-08 108.5 137.0 100.1 127.6
May-08 107.7 138.3 100.9 128.3
Jun-08 111.8 139.5 101.4 128.9
Jul-08 111.0 140.2 101.6 129.3
Aug-08 111.7 139.7 101.9 129.1
Sep-08 111.1 139.5 101.9 129.2
Oct-08 110.8 138.1 101.8 129.0
Nov-08 109.5 135.4 100.9 128.4
Dec-08 107.6 134.0 100.5 128.0
Jan-09 108.2 134.6 99.9 128.0
Feb-09 107.0 135.3 99.6 128.2
Mar-09 107.0 135.6 99.9 128.2
Apr-09 106.9 136.0 100.0 128.3
May-09 106.6 136.5 99.8 128.3
Jun-09 109.6 137.5 99.6 128.7
Jul-09 98.2 137.3 99.3 128.5
Aug-09 98.8 137.7 99.6 128.9
Sep-09 99.2 137.7 99.6 128.8
Oct-09 99.5 137.8 99.2 128.8
Nov-09 100.6 137.9 99.0 129.1
Dec-09 101.9 137.7 98.8 129.1
Jan-10 101.5 138.2 98.6 129.3
Feb-10 102.7 138.2 98.5 129.4
Mar-10 102.4 138.7 98.8 130.0
Apr-10 102.8 139.0 98.8 130.2
May-10 103.1 139.3 98.9 130.4
Jun-10 102.9 138.9 98.9 130.5

Sources: CEIC, China National Statistics website and Thomson Reuters

28
APPENDIX B

Table 1: RMB/USD Exchange Rates and Over/ Undervaluation


Month Nominal Real Difference in Overvalued(+) % Change in
Exchange Exchange Exchange Undervalued(-) Nominal
Rate Rate Rates % Exchange Rate
Jan-05 8.29 6.83 -1.46 -17.62
Feb-05 8.29 6.95 -1.33 -16.07 0.00
Mar-05 8.29 6.87 -1.42 -17.11 0.00
Apr-05 8.29 6.79 -1.50 -18.10 0.00
May-05 8.29 6.76 -1.53 -18.43 0.00
Jun-05 8.29 6.79 -1.50 -18.06 0.00
Jul-05 8.24 6.73 -1.51 -18.30 -0.58
Aug-05 8.11 6.56 -1.55 -19.09 -1.53
Sep-05 8.10 6.45 -1.65 -20.36 -0.08
Oct-05 8.10 6.46 -1.65 -20.31 -0.03
Nov-05 8.09 6.50 -1.59 -19.60 -0.16
Dec-05 8.08 6.57 -1.51 -18.72 -0.12
Jan-06 8.07 6.51 -1.56 -19.38 -0.13
Feb-06 8.06 6.42 -1.64 -20.36 -0.17
Mar-06 8.04 6.36 -1.68 -20.88 -0.18
Apr-06 8.03 6.32 -1.70 -21.25 -0.20
May-06 8.02 6.30 -1.72 -21.46 -0.01
Jun-06 8.02 6.29 -1.73 -21.56 -0.07
Jul-06 8.00 6.23 -1.77 -22.13 -0.24
Aug-06 7.98 6.22 -1.76 -22.08 -0.18
Sep-06 7.95 6.23 -1.71 -21.56 -0.48
Oct-06 7.91 6.23 -1.68 -21.21 -0.42
Nov-06 7.88 6.25 -1.63 -20.70 -0.47
Dec-06 7.83 6.26 -1.58 -20.12 -0.54
Jan-07 7.80 6.18 -1.63 -20.84 -0.40
Feb-07 7.76 6.15 -1.62 -20.82 -0.49
Mar-07 7.75 6.11 -1.63 -21.08 -0.19
Apr-07 7.74 6.04 -1.69 -21.85 -0.17
May-07 7.69 6.00 -1.69 -22.02 -0.61
Jun-07 7.64 6.01 -1.63 -21.39 -0.58
Jul-07 7.59 5.97 -1.62 -21.39 -0.73
Aug-07 7.58 6.09 -1.49 -19.68 -0.04
Sep-07 7.53 6.02 -1.51 -20.09 -0.68
Oct-07 7.51 6.01 -1.51 -20.05 -0.27
Nov-07 7.43 5.93 -1.50 -20.22 -1.07
Dec-07 7.38 5.87 -1.51 -20.46 -0.68
Source: Authors compilation based on CEIC database

29
Table 1(Continued): RMB/USD Exchange Rates and Over/ Undervaluation
Month Nominal Real Difference in Overvalued(+) % Change in
Exchange Exchange Exchange Undervalued(-) Nominal
Rate Rate Rates % Exchange Rate
Jan-08 7.26 5.78 -1.48 -20.43 -1.68
Feb-08 7.18 5.78 -1.40 -19.48 -1.07
Mar-08 7.09 5.64 -1.45 -20.43 -1.30
Apr-08 7.01 5.55 -1.46 -20.80 -1.07
May-08 6.98 5.44 -1.55 -22.13 -0.39
Jun-08 6.91 5.54 -1.37 -19.83 -1.05
Jul-08 6.85 5.42 -1.43 -20.86 -0.92
Aug-08 6.86 5.49 -1.38 -20.04 0.20
Sep-08 6.85 5.46 -1.39 -20.35 -0.16
Oct-08 6.85 5.50 -1.35 -19.78 0.01
Nov-08 6.84 5.53 -1.31 -19.17 -0.13
Dec-08 6.87 5.51 -1.36 -19.74 0.38
Jan-09 6.85 5.50 -1.35 -19.66 -0.30
Feb-09 6.85 5.41 -1.43 -20.96 -0.01
Mar-09 6.85 5.40 -1.44 -21.08 0.00
Apr-09 6.84 5.38 -1.47 -21.41 -0.06
May-09 6.83 5.34 -1.50 -21.90 -0.13
Jun-09 6.84 5.45 -1.39 -20.30 0.15
Jul-09 6.82 0.00 -6.82 -20.65 -0.32
Aug-09 6.82 0.00 -6.82 -20.66 0.01
Sep-09 6.82 0.00 -6.82 -20.66 -0.08
Oct-09 6.82 0.00 -6.82 -20.69 0.00
Nov-09 6.82 0.00 -6.82 -20.73 0.03
Dec-09 6.82 0.00 -6.82 -20.76 -0.02
Jan-10 6.82 0.00 -6.82 -20.77 0.03
Feb-10 6.82 0.00 -6.82 -20.77 0.01
Mar-10 6.82 0.00 -6.82 -20.76 -0.06
Apr-10 6.82 0.00 -6.82 -20.74 -0.01
May-10 6.82 0.00 -6.82 -20.72 0.04
Jun-10 6.81 0.00 -6.81 -20.69 -0.11
Source: Authors compilation based on CEIC database

30
Table 2: RMB/JPY Exchange Rates and Over / Undervaluation
Month Nominal Real Difference in Overvalued(+) % Change in
Exchange Exchange Exchange Undervalued(-) Nominal
Rate Rate Rates % Exchange Rate
Jan-05 0.080 0.082 0.002 2.31
Feb-05 0.079 0.083 0.004 4.53 -1.74
Mar-05 0.079 0.082 0.003 3.42 -0.13
Apr-05 0.077 0.079 0.002 2.72 -1.93
May-05 0.078 0.080 0.002 2.62 0.54
Jun-05 0.076 0.078 0.002 2.52 -1.83
Jul-05 0.074 0.076 0.002 2.83 -3.49
Aug-05 0.073 0.075 0.002 2.22 -0.42
Sep-05 0.073 0.074 0.001 1.51 -0.37
Oct-05 0.071 0.072 0.001 1.81 -3.26
Nov-05 0.068 0.070 0.002 2.32 -3.22
Dec-05 0.068 0.070 0.002 2.52 -0.28
Jan-06 0.070 0.072 0.002 2.72 2.36
Feb-06 0.068 0.070 0.002 2.75 -2.15
Mar-06 0.069 0.070 0.001 1.72 0.45
Apr-06 0.068 0.070 0.001 1.91 -0.19
May-06 0.072 0.073 0.001 1.81 4.79
Jun-06 0.070 0.071 0.001 1.91 -2.29
Jul-06 0.069 0.070 0.001 1.71 -1.22
Aug-06 0.069 0.070 0.001 1.29 -0.46
Sep-06 0.068 0.069 0.001 1.49 -1.57
Oct-06 0.067 0.068 0.001 1.60 -1.76
Nov-06 0.067 0.069 0.002 2.62 0.66
Dec-06 0.067 0.069 0.002 3.42 -0.49
Jan-07 0.065 0.067 0.002 3.02 -2.88
Feb-07 0.064 0.067 0.003 4.05 -0.87
Mar-07 0.066 0.069 0.003 4.34 2.66
Apr-07 0.065 0.068 0.002 3.73 -1.42
May-07 0.064 0.066 0.002 3.82 -2.10
Jun-07 0.062 0.065 0.003 5.03 -2.16
Jul-07 0.062 0.066 0.003 5.14 0.05
Aug-07 0.065 0.069 0.004 6.71 4.09
Sep-07 0.065 0.070 0.004 6.41 0.87
Oct-07 0.065 0.069 0.004 6.39 -0.93
Nov-07 0.067 0.072 0.005 7.01 3.06
Dec-07 0.066 0.070 0.004 6.39 -1.73
Source: Authors compilation based on CEIC database

31
Table 2(Continued): RMB/JPY Exchange Rates and Over / Undervaluation
Month Nominal Real Difference in Overvalued(+) % Change in
Exchange Exchange Exchange Undervalued(-) Nominal
Rate Rate Rates % Exchange Rate
Jan-08 0.067 0.072 0.005 7.21 2.21
Feb-08 0.067 0.073 0.006 9.03 -0.27
Mar-08 0.070 0.076 0.006 8.08 4.87
Apr-08 0.068 0.074 0.006 8.39 -2.52
May-08 0.067 0.072 0.005 6.74 -2.06
Jun-08 0.065 0.071 0.007 10.29 -3.43
Jul-08 0.064 0.070 0.006 9.25 -0.91
Aug-08 0.063 0.069 0.006 9.65 -2.16
Sep-08 0.064 0.070 0.006 9.03 2.05
Oct-08 0.068 0.074 0.006 8.82 6.58
Nov-08 0.071 0.077 0.006 8.50 3.29
Dec-08 0.075 0.081 0.005 7.03 6.70
Jan-09 0.076 0.082 0.006 8.28 0.70
Feb-09 0.074 0.080 0.005 7.39 -2.05
Mar-09 0.070 0.075 0.005 7.10 -5.55
Apr-09 0.069 0.074 0.005 6.87 -1.39
May-09 0.071 0.076 0.005 6.83 2.25
Jun-09 0.071 0.078 0.007 10.02 0.13
Jul-09 0.072 0.072 -0.001 -1.11 2.34
Aug-09 0.072 0.071 -0.001 -0.80 -0.56
Sep-09 0.075 0.074 0.000 -0.40 3.81
Oct-09 0.076 0.076 0.000 0.29 1.19
Nov-09 0.077 0.078 0.001 1.61 1.26
Dec-09 0.076 0.079 0.002 3.12 -0.59
Jan-10 0.075 0.077 0.002 2.93 -1.79
Feb-10 0.076 0.079 0.003 4.25 1.40
Mar-10 0.075 0.078 0.003 3.63 -0.49
Apr-10 0.073 0.076 0.003 4.03 -3.11
May-10 0.074 0.077 0.003 4.23 1.60
Jun-10 0.075 0.078 0.003 4.04 1.09
Source: Authors compilation based on CEIC database

32
Table 3: RMB/Euro Exchange Rates and Overvaluation Undervaluation
Month Nominal Real Difference in Overvalued(+) % Change in
Exchange Exchange Exchange Undervalued(-) Nominal
Rate Rate Rates % Exchange Rate
Jan-05 10.89 9.42 -1.47 -13.50
Feb-05 10.78 9.48 -1.30 -12.02 -1.03
Mar-05 10.94 9.50 -1.44 -13.19 1.52
Apr-05 10.73 9.22 -1.51 -14.09 -1.98
May-05 10.52 9.02 -1.50 -14.24 -1.90
Jun-05 10.09 8.63 -1.45 -14.41 -4.16
Jul-05 9.92 8.52 -1.41 -14.17 -1.62
Aug-05 9.97 8.50 -1.48 -14.80 0.54
Sep-05 9.95 8.40 -1.55 -15.56 -0.26
Oct-05 9.75 8.24 -1.51 -15.53 -1.97
Nov-05 9.54 8.09 -1.45 -15.23 -2.19
Dec-05 9.58 8.12 -1.46 -15.26 0.42
Jan-06 9.76 8.33 -1.43 -14.66 1.86
Feb-06 9.63 8.12 -1.51 -15.71 -1.31
Mar-06 9.67 8.09 -1.57 -16.28 0.38
Apr-06 9.82 8.20 -1.62 -16.50 1.63
May-06 10.24 8.55 -1.69 -16.54 4.26
Jun-06 10.16 8.48 -1.68 -16.53 -0.79
Jul-06 10.16 8.45 -1.71 -16.87 0.01
Aug-06 10.22 8.52 -1.71 -16.69 0.60
Sep-06 10.12 8.45 -1.67 -16.53 -0.98
Oct-06 9.99 8.32 -1.67 -16.68 -1.37
Nov-06 10.13 8.48 -1.65 -16.27 1.45
Dec-06 10.34 8.70 -1.64 -15.88 2.07
Jan-07 10.14 8.53 -1.62 -15.95 -1.91
Feb-07 10.14 8.55 -1.60 -15.75 0.01
Mar-07 10.26 8.64 -1.62 -15.81 1.12
Apr-07 10.44 8.71 -1.73 -16.60 1.80
May-07 10.40 8.68 -1.71 -16.48 -0.44
Jun-07 10.26 8.64 -1.61 -15.74 -1.34
Jul-07 10.40 8.79 -1.62 -15.53 1.39
Aug-07 10.34 8.90 -1.44 -13.90 -0.58
Sep-07 10.46 8.95 -1.52 -14.49 1.17
Oct-07 10.69 9.12 -1.57 -14.66 2.19
Nov-07 10.90 9.29 -1.62 -14.82 1.99
Dec-07 10.75 9.09 -1.66 -15.48 -1.40
Source: Authors compilation based on CEIC database

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Table 3 (Continued): RMB/Euro Exchange Rates and Overvaluation Undervaluation
Month Nominal Real Difference in Overvalued(+) % Change in
Exchange Exchange Exchange Undervalued(-) Nominal
Rate Rate Rates % Exchange Rate
Jan-08 10.67 9.11 -1.56 -14.66 -0.73
Feb-08 10.57 9.13 -1.44 -13.66 -0.93
Mar-08 10.98 9.35 -1.62 -14.79 3.81
Apr-08 11.05 9.40 -1.65 -14.97 0.70
May-08 10.87 9.13 -1.75 -16.06 -1.64
Jun-08 10.76 9.34 -1.43 -13.26 -1.00
Jul-08 10.81 9.27 -1.53 -14.19 0.41
Aug-08 10.29 8.91 -1.38 -13.45 -4.79
Sep-08 9.86 8.48 -1.38 -14.01 -4.16
Oct-08 9.16 7.86 -1.29 -14.14 -7.17
Nov-08 8.70 7.41 -1.28 -14.77 -5.01
Dec-08 9.25 7.78 -1.47 -15.94 6.37
Jan-09 9.16 7.74 -1.42 -15.48 -1.01
Feb-09 8.78 7.32 -1.46 -16.58 -4.17
Mar-09 8.93 7.45 -1.47 -16.50 1.70
Apr-09 9.04 7.53 -1.51 -16.69 1.25
May-09 9.31 7.73 -1.57 -16.91 2.98
Jun-09 9.60 8.17 -1.43 -14.87 3.10
Jul-09 9.63 7.36 -2.27 -23.58 0.36
Aug-09 9.76 7.48 -2.28 -23.33 1.30
Sep-09 9.95 7.67 -2.29 -22.96 2.02
Oct-09 10.12 7.82 -2.31 -22.77 1.74
Nov-09 10.18 7.94 -2.25 -22.05 0.59
Dec-09 9.99 7.88 -2.11 -21.10 -1.90
Jan-10 9.76 7.67 -2.10 -21.47 -2.29
Feb-10 9.36 7.43 -1.93 -20.63 -4.16
Mar-10 9.28 7.31 -1.97 -21.23 -0.77
Apr-10 9.19 7.25 -1.94 -21.07 -1.06
May-10 8.63 6.82 -1.81 -20.94 -6.05
Jun-10 8.35 6.58 -1.77 -21.17 -3.31
Source: Authors compilation based on CEIC database

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