Nonlinear adjustment to purchasing power parity in China

This study applies a simple and powerful nonlinear unit root test proposed by Sollis (2009) to investigate the Purchasing Power Parity (PPP) for China's real exchange rate vis-a-vis her nine trading partner countries over the period January 1986 to October 2009. The empirical results indicate that China's real exchange is a nonlinear process and a unit root in real exchange rate was not found for most of the cases under study. These results provide strong support for PPP for China relative to her major trading partner countries.