Valuation of Rmb

The People’s Republic of China was founded in 1949 and leaded by the Chinese Communist Party (CCP) chairman, Mao Zedong, for almost three decade. China and its currency have very long history in both economy and society. The fastest growth of economic expansion, increasing foreign reserve accumulation and trade surplus account have been argued by many analysts and economists that Chinese currency is undervalued, that is, it is also relevant to the statement of Henry Paulson, United States Treasury Secretary in June 18, 2008 to induce China to reform or revalue its currency in order to bring the substantial and balance growth.

The purpose of this paper aims to inform the current economic situation and the present exchange rate regime in China. Discuss about the movement of the Chinese currency, Renminbi (RMB) or Yuan, in the first half of 2008 and also debate the estimates of equilibrium value of RMB based on the issue “Is the Chinese currency undervalue against its current exchange rate?” and the school of theory “Purchasing Power Parity (PPP)”. In the following section, we will analyze in case the RMB is appreciated, what would be the effect on both Chinese and U.S. economy.

Current economic situation and present exchange rate regime

Nowadays, China is recognized as one of the global economic leaders ranked after the United States, Euro Group and Japan. The rapid growth of economic measured by real gross domestic product (GDP) from 1979 to 2006 grew at an average annual rate of about 9.7%, significantly from the role of trade surplus and foreign direct investment (Morrison & Labonte, 2007, p.4). In 2006, it increased to approximately 11.1% and peaked in the first half of 2007 before slowing down to 10.6% in the first quarter of 2008 (see Figure1, Kujis, 2008) which caused by a global economic downturn, particularly from the subprime crisis in the U.S. that effected to global financial crisis and decreasing in China’s trade account balance. In addition,...