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CeBER

Centre for Business and Economics Research - CeBER

CeBER Working Paper No. 2017-09

   

The Renminbi: A Warrior for Competitiveness?


Pedro Bação
António Portugal Duarte &
Matheus Santos

CeBER and Faculty of Economics, University of Coimbra

   
   


Abstract:

The purpose of this paper is to describe the evolution of China’s exchange rate policy, relate it to the international competitiveness of the Chinese economy and assess the claims that China has been manipulating the exchange rate to foster its competitiveness. We begin by reviewing the historical evolution of China’s exchange rate policy. We then describe the implications of the constraint represented by the “trilemma” (or “impossible trinity”) of international economics for China’s economic policy. We assess whether the Renminbi can meet the requirements to be considered an international reserve currency. We also propose to evaluate the degree of currency manipulation by looking at the magnitude of the exchange rate forecast errors. Our interpretation of the test is that currencies subject to higher degrees of manipulation should be easier to forecast. We find that the magnitude of the forecast errors associated with the Chinese currency’s exchange rate is not noticeably smaller than the magnitudes observed for other currencies. This leads us to conclude that our test does not corroborate the view that China is a notorious currency manipulator. Countries wishing to improve their international competitiveness may therefore look to China’s history for insights. However, it is unlikely that policies oriented to setting the exchange rate to artificial values will find support in China’s exchange rate policy in recent years. Our conclusion runs counter the common view on China’s exchange rate policy.

Keywords: Competitiveness, exchange rate, monetary policy, forecasting.

JEL Classification: F10, F31, F33, F41, F47.

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