China | Is RMB undervalued?

Summary

The report analyzes the undervaluation issue of the RMB. Based on the MB and BEER models, it concludes that while there indeed exists periods of undervaluation, its degree of undervaluation is significantly lower than often claimed.

Key points

• Key points:
• The potential RMB to USD exchange rate undervaluation has long-lasting been a hot topic, as China’s current account have kept large surplus for a long time in the past decades. Thus, people always doubt Chinese government has deliberately guided RMB depreciation in order to keep its exports competitiveness.
• However, currency valuation is challenging as macro foundation-based exchange rate forecast models cannot beat a random walk model is a foundational concept in international finance literature.
• According to the Macro Balance (MB) model, the largest period of RMB undervaluation was between 2005 and 2009, with an estimated deviation of 43-57% from its intrinsic value.
• The Behavioral Equilibrium Exchange Rate (BEER) model places the largest undervaluation period between 2021 and 2023, with an undervaluation of around 9.3%.
• Our conclusion is that the largest possible appreciation of the RMB to reach its "intrinsic value" is estimated at 14%, currently, a figure lower than suggested by other research (25-35%).

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