Working Paper BETA #2011-23

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Title : Motivations and strategies for a real revaluation of the Yuan.

Author(s) : Meixing Dai

Abstract : Most Western economists and policymakers agree that the Yuan is significantly undervalued and push for its quick nominal revaluation. This paper defends that many domestic and foreign factors could be responsible for the Yuan’s undervaluation, and the People’s bank of China (PBC) cannot optimally invest growing foreign exchange reserves. It provides a theoretical framework to discuss the optimal strategy associating a gradual nominal revaluation of the Yuan with higher inflation, and structural and macroeconomic policies to bring the real exchange rate to its equilibrium level. This strategy allows absorbing external imbalances while laying down the foundation for China’s long-term growth.

Key-words : Real revaluation; Yuan; Renminbi (RMB); foreign exchange reserves; external imbalance; macroeconomic adjustment measures.

JEL Classification : E2, E5, E6, F3.