Yuan’s Valuation under Managed Floating Exchange Rate Regime

Abstract

To U.S. politicians, the undervaluation of the Chinese yuan is usually blamed for the tremendous trade deficit between the U.S. and China. This study examines the yuan’s valuation under the Managed Floating Exchange Rate regime through three methods. We compare the real effective exchange rate for U.S. and China; actual and PPP estimated bilateral exchange rates; and actual and a multi-currency basket approach for estimated exchange rates. Although the results are not the same when different methods are used, our results suggest that, since the beginning of the Managed Floating Exchange Rate regime, the Chinese yuan has been undervalued only for a few years. After that, the yuan is either overvalued or fluctuates moderately between overvaluation and undervaluation, depending on which method is used. Therefore, there is no evidence that the yuan has been undervalued all the time. More importantly, it seems the price of the yuan has been relatively fair in the last couple of years no matter which valuation method is used.

Keywords:

• U.S.-China bilateral exchange rate
• undervaluation
• overvaluation
• real effective exchange rate
• Yuan/dollar