The RMB Undervaluation Puzzle: An Input-Output Analysis * 2011 2 26 SSRN Working Paper #1774077 Available at: http://ssrn.com/abstract=1774077 JEL F31 L51 D57 Abstract: The RMB undervaluation puzzle refers to two related facts: 1) that the RMB real exchange rate has been depreciating along with China s strong economic growth; 2) that most Western researchers agree that the RMB is seriously undervalued in recent years. We propose that this puzzle is mainly caused by an inter-regional race to the bottom in China, which reduces average input usage and labor cost, thus seriously depressing the general price and wage level through three types of price multiplier effects. We extend the standard input-output model to simulate the price-level effect of racing to the bottom in two key sectors (road transportation and coal mining), using actual input-output data. The results show that, quantitatively, our model can fully explain the RMB undervaluation puzzle. The implication is that in order for the RMB real exchange rate to reach and remain at a proper level, inter-regional race to the bottom in China must be effectively tackled, which entails a radical overhaul of China s economic system and the transition of its development model. Keywords: the RMB real exchange rate, race to the bottom, input-output model JEL classification: F31; L51; D57 * 100871 Tel.: 86-10-6275-6352; Fax: 86-10-6275-4237; E-mail address : tangxiang_pku@163.com
JEL F31 L51 D57 2006 The Balassa- Samuelson model Balassa 1964 Samuelson 1964 / 1 1980 2005 25 2004 1980 37% 1 1 2002 20042005 2007 2009 enhanced-ppp 1 2006 1
2005 30% Bosworth 2004 Coudert Couharde 2005 Frankel 2006 Subramanian 2010 Coudert Couharde 2005 Goldstein Lardy 2006 2005 26% 36%Cline Williamson 2007 Krugman 2009 Bergsten 2010 1 1980 2002 2007 84.5% 1/2 20082010 2
2007 2007 20~30% 24~44% 30~50% 40~110% 2005 2010 race to the bottom / Process and Production Methods PPMs 2007 1990 2010 2010 Chan, 2003 3
1990 1993 40% 2008 Rosen Houser 2007 2 2004 2007 2008 Midler 2009 3 2005 I II III 2 {p 1, p 2, p 3, p 4 } 4 p w ω 2 http://zh.wikipedia.org 3 4
w ω 2 I w p 1, p 2,, p n p II ω I I p p w w p 1, p 2,, p n I p p III ω ω ω w p ω ω w p ω 1% w p 4% 3% 1% = 4% 3% w p ω w p ω w p 1990 II III I I II III 2% 5
20%70% 4 2004 2001 2003 6.1% 20.6% 14.5% 2006 20 0.20 0.25 / 0.38 0.45 / 2 3 4 4 5 2006 6 12 20 80 0.25 6 2004 2004 5 1 7 1 100% 4-5 8-9 100% 100% 1 3 8 4 2004 6 4 5 4 6 2006 6 12 7 2008 11 11 8 4 2004 5 20 6
9 10 2004 7 1 2007 50% 69.5% 42 2007 53% 11 2008 2008 2 2005 410 2 2 2005 70 2005 37% 80% 9 7 10 8 11 2007 5 19 7
70 17 10 7 30 50% 25% 30% 2000 2006 17.5% 21% 19.25% 3.5% 15.75% 48 50 2004 12 40% 12 2 223 / 2005 280 / Ax + y = x 1 A i a i i x y 1 1 A x y { p 1, p 2,, p n } 12 2009 12 8 500 2005 2 21 2005 2 21 8
{ l, t, d, r } p + = a1 p1 + a2 p2 + + an pn + l + t + d r 2 w { q t, q d, q r }{ t, d, r }2 p + = a p + a p + + an pn + l w + t qt + d qd rq 3 1 1 2 2 r { p 1, p 2,, p n }{w, q t, q d, q r } 13 1 a + + a + l + t + d + r 4 = 1 + a2 3 n t d r p = A' p + lw + tq + dq + rq 5 A A { l, t, d, r } 1 p = ( I A') ( lw + tq + dq + rq ) I 2007 135 6 135 2007 7 A 134 6 1 p = ( I A') ( lw + tq + dq + rq + gq t t d d r r g ) 6 7 g A 7 q g 134 97 13 7 A 96 l 96 14 2007 68% {w, q t, q d, q r, q g } 68% 0.5% I {w, q t, q d, q r, q g } 7 3 2.56% 76% 2007 13 14 37 9
y 2.55% 1.9% 11% 1.3% II{w, q t, q d, q r } ω t d r r r 7 3 {w, q t, q d } q r 7.3% 82% I II 6.8% 3 6 2005 1 2 57% 1 2 57% 114% 3 1 2 I II 9.7% 25.4% 3 4.5~7.2% I II 18.6~37.3% III ω ω ω ω 15 ω ω 2% 3 w p 6~7% 4~5% 24~44% 20~30% 2002 123 1997 124 4 2002 3 2007 2002 1997 2002~2007 2001 Rosen Houser 2007 4 15 2007 10
5% 10% A 105% 110% 4 40~110% 30~50% 2005 30~40% 16 20% 4 2007 7% 2007 19%~44% 15%~21% 5%~11% 17 2010 16 Ceglowski Golub 2007 17 11
2010 ------------------------------------------------------------ Balassa, Bela. 1964. "The Purchasing Power Parity Doctrine: A Reappraisal." Journal of Political Economy, 72(6): 584-596. Bergsten, C. Fred. 2010. Correcting the Chinese Exchange Rate: An Action Plan. Testimony before the Committee on Ways and Means, US House of Representatives, March 24. Bosworth, Barry. 2004. Valuing the Renminbi. Paper presented to the Tokyo Club Research Meeting, February. Ceglowski, Janet, and Stephen Golub, 2007, Just How Low Are China s Labor Costs? The World Economy, 30(4), April, pp. 597-617. Chan, Anita, 2003. A Race to the Bottom : Globalization and China's Labour Standards. China Perspectives 46:41-49. Cline, William R., and John Williamson. 2007. Estimates of the Equilibrium Exchange Rate of the Renminbi: Is There a Consensus and If Not, Why Not? Paper presented at the Conference on China s Exchange Rate Policy, Peterson Institute, Washington DC, October. Coudert, V. and C. Couharde (2005), Real Equilibrium Exchange Rate in China, CEPII Working Paper No.2005-01, Paris. Frankel, Jeffrey. 2006. On the Yuan: The Choice between Adustment under a Fixed Exchange Rate and Adustment under a Flexible Rate. CESifo Economic Studies. Goldstein, Morris, and Nicholas Lardy. 2006. China s Exchange Rate Policy Dilemma. American Economic Review, 96(2), May, pp. 422-26. Krugman, Paul. 2009. The Chinese Disconnect. New York Times (October 22). Midler, Paul, 2009. Poorly Made in China: An Insider's Account of the Tactics Behind China's Production Game. Hoboken, New Jersey: Wiley. Rosen, Daniel H., and Trevor Houser. 2007. What Drives China s Demand for Energy (and What It Means for the Rest of Us), in C. Fred Bergsten, Nicholas Lardy, Bates Gill, and Derek Mitchell, eds. The China Balance Sheet in 2007 and Beyond, Washington: Peterson Institute and Center for Strategic and International Studies, April. Samuelson, Paul A. 1964. "Theoretical Notes on Trade Problems," Review of Economics and Statistics, 46(2):145-54. Subramanian, Arvind. 2010, New PPP-based estimates of renminbi undervaluation and policy implications, Policy Brief 10-8. Washington: Peterson Institute. Wang, Tao. 2004. Exchange Rate Dynamics. In E. Prasad, ed., China s Growth and Integration into the World Economy: Prospects and Challenges, IMF Occasional Paper no.232 (Washington: International Monetary Fund). 2005 2005 2004 2004 12 12
2004 : 2004 11 2007 2007 3 2006 : 2006 6 2006 :(1979 2005) () 2006 2 2008 : 2010 : SSRN http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1523083 2010 4 13 2009-2009 4 2002 2002 2008 2008 12 2008 : 2008 6 2007 : http://www.caogen.com/blog/infor_detail.aspx?id=18&articleid=282 2011 2 26 13
1. = 100 80 70 60 50 40 30 20 10 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Penn World Table 6.3 2. p 1 p 2 ω p 3 p 4 p w 14
/ 1. / / / 25 15 160 0.28 0.56 100 25 10 210 0.23 0.46 100 30 15 150 0.33 0.50 51.5 25 10 280 0.32 0.57 78.1 20 13 30 0.57 0.67 17.5 0.44 0.82 86.4 1.00 1.00 0 4-5 8-9 100% 2 / 3 / 35% 1.5 / 2 / 35% 100% 2004 2. / 1. 69.47 2. 91.7 3. 34.5 a. 65 b. 71.03 4. c. 14.53 d. 11.2 e. 54.64 216.4 412.07 2008 15
3. 2007 135 1 1 1 2% 1.0256 1.0731 1.0333 1.0968 1.0611 1.1864 1.2368 1 1.0731 1 1.0968 1 1.1864 1.2615 0.9751 1 0.9678 1 0.9424 1 1.0200 1.0293 1.0796 1.7227 1.8296 1.7923 2.0054 2.0913 1.7568 1.8239 1.0100 1.0587 1.7796 1.9534 2.0234 1.0144 1.0626 1.1255 1.1958 1.1470 1.2848 1.3402 1.0196 1.0601 1.0739 1.1308 1.0979 1.2099 1.2550 1.0255 -- 1.0176 -- 1.0447 -- -- 1.0185 -- 1.1693 -- 1.1920 -- -- 1.1106 -- 1.0358 -- 1.1522 -- -- 1.0131 -- 1.0397 -- 1.0542 -- -- 2 2 1.0801 1.2540 1.1112 1.3730 1.4411 1 1.2540 1 1.3730 1.4700 0.9258 1 0.8999 1 1.0200 2.7400 3.1755 2.8685 3.5348 3.7080 1.0241 1.1540 1.8118 2.1667 2.2590 1.3021 1.5136 1.3341 1.6514 1.7339 1.1779 1.3429 1.2083 1.4570 1.5217 1.0425 -- 1.0717 -- -- 1.4077 -- 1.4366 -- -- 1.0862 -- 1.2109 -- -- 1.0955 -- 1.1121 -- -- 16
4. 1997 2002 2007 1 2002 1 2% 1997 1 2% 2007 5% 2% 1.052 1.225 1.311 1.051 1.259 1.372 1.105 1.350 1.416 1 1.225 1.338 1 1.259 1.399 1 1.350 1.444 0.950 1 1.020 0.952 1 1.020 0.905 1 1.020 1.529 1.763 1.881 1.575 1.903 2.080 1.085 1.337 1.405 1.794 2.070 2.209 1.857 2.246 2.456 1.068 1.254 1.304 1.106 1.273 1.357 1.120 1.329 1.442 1.111 1.361 1.429 1.068 1.231 1.313 1.070 1.278 1.391 1.107 1.318 1.375 1.043 -- -- 1.034 -- -- 1.089 -- -- 1.071 -- -- 1.071 -- -- 1.243 -- -- 1.125 -- -- 1.112 -- -- 1.201 -- -- 1.062 -- -- 1.073 -- -- 1.175 -- -- 2 2 10% 1.077 1.359 1.466 1.082 1.472 1.628 1.235 2.050 2.202 1 1.359 1.495 1 1.472 1.660 1 2.050 2.246 0.928 1 1.020 0.925 1 1.020 0.809 1 1.020 2.092 2.608 2.804 2.205 3.026 3.354 1.189 2.011 2.164 1.810 2.255 2.424 1.876 2.591 2.876 1.149 1.755 1.868 1.206 1.498 1.608 1.239 1.664 1.833 1.246 2.084 2.240 1.111 1.383 1.486 1.119 1.516 1.675 1.238 1.946 2.079 1.059 -- -- 1.049 -- -- 1.198 -- -- 1.132 -- -- 1.137 -- -- 1.560 -- -- 1.159 -- -- 1.151 -- -- 1.455 -- -- 1.109 -- -- 1.135 -- -- 1.391 -- -- 17