An Exchange Rate Assessment: A Valuation of the Renminbi in Light of Economic Liberalization

Andreas Linnerud & Maren Serine Husebø

Student thesis: Master thesis

Abstract

In 2005, as part of the liberalization process of China`s economy, the renminbi was de- pegged from the US dollar and allowed to fluctuate under a managed float, referenced to a basket of currencies. The renminbi immediately appreciated, enhancing the suspicion that it had been manipulated to gain competitive trade advantages at the cost of its trading partners, in particular, the US. Recent years, however, the renminbi has seen a depreciating trend, as capitals flee the country and the economy is slowing. This thesis investigates whether the renminbi is fairly valued in today’s foreign exchange market, or if Chinas way of conducting monetary policy keeps it misaligned. Through case studies of China`s balance of payments and foreign exchange reserves, a regression model using macroeconomic variables and an analysis of the Purchasing Power Parity exchange rates, we find the renminbi to be slightly above an equilibrium value, but within a range to be considered fairly valued. Moreover, we argue that China`s pursuit of making the renminbi a global reserve currency will keep it from losing substantial value.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2017
Number of pages118