Edith Cowan University
Faculty of Business and Law
School of Accounting, Finance and Economics
We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-à-vis the U.S. dollar from 1992 to 2009. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect China's processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 2009. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 2009, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 46 percent as of 2009 compared to from the year 2004 level. Such sharp appreciation of the EER corresponds to the dramatic increase in China's current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China.