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China's Long-Run Exchange Rate: A Time Series Estimation

The Chinese currency has been accused of being undervalued due to government intervention. This article tries to measure the intervention by the Chinese government and estimate the long-run exchange rate without intervention. Using the monthly data of China and the United States from 1996 to 2003, we modeled the actual exchange rate of RMB against the U.S. dollar as a function of the intervention by the government, the inflation differential, and the rate of real exchange rate depreciation. Using the estimated coefficients, we calculate the long-run nominal exchange rate without government intervention. The estimation suggests that, without government intervention, the exchange rate of the RMB is undervalued and would have appreciated by 16–20% between 1996 and 2003.