China's currency, the renminbi (RMB), is facing scrutiny regarding its valuation in the international market. Robin Brooks, a Senior Fellow at the Brookings Institution, suggests that China's RMB is likely noticeably undervalued, which contradicts widely held beliefs about its depreciation. This discussion is part of a broader series focused on the future of U.S.-China policy.
Brooks uses the macro-balance approach, an integral part of the IMF's External Sector Report, to measure the undervaluation. "This approach proceeds in two steps," Brooks explains. "In the first, it derives an underlying current account position... In the second, it calculates how much the real effective exchange rate must rise or fall to close the gap between the underlying current account and some notion of equilibrium."
Despite China's large current account surplus, Brooks believes that China's GDP per capita, still below that of advanced economies, suggests a need for smaller surpluses. He points out that the RMB appears strong due to the fall in commodity currencies, but this masks a significant undervaluation. Brooks notes, "The perspective tends to understate the degree of RMB undervaluation."
Brooks presents data forecasting a 3.5% current account surplus in 2025, the highest since 2010. "If we assume an equilibrium current account surplus of 0.5%, this puts the undervaluation of the real effective RMB above 20%," Brooks states. Even with a 2% equilibrium, the undervaluation remains over 10%.
The article addresses the contention that the RMB should fall if market forces were in play. Brooks argues, "The RMB has been stable against the U.S. dollar even as the United States has ratcheted up the average tariff rate on China by 20 percentage points." This stability raises questions about China's influence over its currency.
Brooks' analysis suggests that China's currency manipulation practices contribute to its trade surplus in non-commodity goods, pointing to significant RMB undervaluation. He acknowledges that his calculations come with caveats but aims to provide a clearer picture of the RMB's undervaluation.
The Brookings Institution supports its publications with diverse funding while maintaining the independent views of its authors.
Robin Brooks, Senior Fellow - Global Economy and Development, shared his analysis on the RMB. The piece emphasizes the complexities and nuances of currency valuation amid geopolitical pressures and economic strategies.
