New Estimates of the Equilibrium Exchange Rate: The Case for the Chinese Renminbi


  • This paper is financially supported by the JSPS (Japan Society for the Promotion of Science) Grant-in-Aid for Scientific Research (B) No. 21330074 and (S) No. 20223003. The first and fourth authors would also like to thank the financial support by the Ohira Foundation. The paper is partly based on the research at the Research Institute of Economy, Trade and Industry (RIETI). We wish to thank Takatoshi Ito, Eiji Ogawa, Akira Kohsaka, Paul De Grauwe, Masanaga Kumakura, Tilak Abeysinghe, Jie Zhang, Shigeyuki Abe, Fumiharu Mieno, the anonymous referees and participants of SCAPE seminar at National University of Singapore (4 November 2010) for their helpful comments on the earlier version of this paper.


We estimate the nominal equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-à-vis the US dollar from 1995 to 2009. While most of the recent empirical studies on the EER employ a cross-country analysis, country-specific factors, especially supply-side real factors, are not fully taken into consideration in estimating the EER. To better reflect China’s processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source-country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International input–output (IIO) table for the period from 1995 to 2009. The results show that the nominal EER of the RMB appreciates sharply from 2006 to 2009, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 74 per cent as of 2008 compared to the year 2004 level. Such sharp appreciation of the nominal EER corresponds to the dramatic increase in China’s current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of China’s intermediate input coefficients and, to a lesser extent, an increase in US import prices of intermediate inputs.