What is China's real exchange rate?

Many have tried to estimate what Chins's real exchange rate ought to be. In a new IMF working paper, Estimating China's "Equilibrium" Real Exchange Rate, economists Steven Dunaway and Xiangming Li survey the literature. Here's their abstract:

The number of studies attempting to estimate the "equilibrium" real value of China's currency has proliferated in recent years as the country's presence in world markets has grown. These studies have sought to establish whether or not a significant part of China's competitive prowess can be attributed to the foreign exchange value of the renminbi. Unfortunately, no consensus has emerged because the studies yield a very wide range of estimates.

The paper looks at a sample of these studies, with estimates of undervaluation ranging from zero to nearly 50 percent. It attributes the wide variation in these estimates to the influence of such factors as the different methodologies used, explanatory variables included, subjective judgments of the various researchers in deriving their results, and instability in underlying economic relationships, especially in a rapidly developing economy like China.

Unfortunately, anyone looking for a clear answer won't find it here. The authors hedge their bets, concluding rather lamely that:

It is also only in time that key underlying economic relationships determining a country’s exchange rate may stabilize sufficiently that they might be estimated with a reasonable degree of confidence. But then again because of the complexity of these relationships, being able to accurately explain movements in exchange rates may remain an elusive objective. In the meantime, estimates of the level of a country’s real exchange rate should continue to be treated with great caution.

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