The equilibrium exchange rate of the Chinese renminbi

Two approaches are used in this paper to estimate the equilibrium exchange rates of the Chinese currency, the renminbi (RMB): the purchasing power parity (PPP) model and the shadow price of foreign exchange (SPFE) model. The SPFEs are estimated including tariffs and import quotas. The paper starts with a test for the long-run PPP using quarterly data. In comparison with the estimated equilibrium exchange rates, we find that the actual rates were in general overvalued. From 1990 to 1994, the official exchange rates are found to lie between the PPP rates and the SPFEs. This implies that the Chinese government has adopted an exchange rate policy that maintains official exchange rates close to equilibrium levels. (C) 1998 Academic Press.