Economists: Chinese Currency Significantly Undervalued

Here is a new article about the valuation of Chinese Renminbi from Wall Street Journal. In these short paper the different opinions between the economists are outlined. Some economists are based on the reducing trade balance form this year, and the others, probably based on a calculation with Purchasing Power Parity.

Economists: Chinese Currency Significantly Undervalued

By Phil Izzo

Last week, a Chinese central bank official said the yuan’s exchange rate with the dollar “isn’t clearly undervalued.” Economists in the latest Wall Street Journal forecasting survey beg to differ.

Twenty-eight of 41 economists who responded to the question said that yuan was undervalued, and 23 of them said it was undervalued by more than 5%. Nine economists said the level was about balanced, and just four said the yuan was overvalued.

Stephen Stanley of Pierpont Securities was among those who said the Chinese currency was at about the right level. “The trade balance is getting less lopsided,” he said.

Meanwhile, Ram Bhagavatula of Combinatorics Capital thinks that while the yuan is undervalued, it’s not a large number. “Other countries in the region are proving more attractive,” he said.

But most of the respondents disagreed. Allen Sinai of Decision Economics estimates the currency is undervalued by up to 30%. And Julia Coronado of BNP Paribas say that if the exchange rate is balanced, China’s currency policy makes no sense. “If it weren’t [undervalued by more than 5%] then what would be the harm in letting it float?,” she said.