Valuation of the renminbi: a competitive exchange rate analysis

Abstract

In light of the controversy regarding the valuation of the Renminbi (RMB), as well as the new status of a global currency after being accepted by the IMF in its Special Drawing Rights Basket, the correct valuation of a currency is reexamined. The importance of this paper is apparent due to both the critical role of currencies in the global trading system and China being a new global economic power. Several typical valuations of the RMB are examined and deemed to be incomplete in their explanation of the currency's effect on China's economy and that of its competitors. The importance of competitor countries instead of trading partners and labour costs instead of price differentials was crucial in forming a new Real Exchange Rate for China, leading to a different theory and an adjusted model for the 'competitive exchange rate'.