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This China Center members-only chart shows the deviation of the RMB’s real effective exchange rate (REER) from its long-term trend, in percentage points. Trend analysis does not assert a long-run equilibrium value for the exchange rate, but rather it is an indicative way to measure the direction of upward or downward pressure on the RMB over time. As such, the chart helps to tease out the cyclical movements that the currency faces, as opposed to establishing a fundamental long-run over- or under-valuation, per se.
As is well-established, China’s currency was clearly under-valued through much of the 2000s as the country experienced its export boom whilst maintaining a pegged exchange rate to the USD until 2005, and introducing a tightly managed crawling peg up until mid-2008. Not coincidentally, this period coincided with the peak in foreign exchange reserve growth by China’s central bank. Since the global financial crisis, however, dynamics for China’s currency have clearly changed.
Please download the full chart for details.