We find it interesting there is very little mention of China’s real exchange rate in the media. With official inflation in China set to outpace that in U.S. by 5 percent this year, coupled with a nominal appreciation of the yuan around 3 percent, the real appreciation is closer to 8-10 percent. The real exchange rate is what matters and was one was of the most critical factors in stimulating domestic demand in Latin America during the 1980’s and ’90’s.
This is illustrated in the following chart showing the impact of the real exchange on Argentina’s nominal GDP in dollar terms and its current account balance after the government implemented a quasi-currency board. Domestic inflation took almost three years to converge on U.S. inflation and as consequence Argentina’s real exchange rate appreciated almost 50 percent, even though the nominal rate was fixed and pegged to the dollar.
P.S. We never could figure out which term to use when referring to China’s currency: Yuan, Renminbi, or RMB? Until, that is, the Wall Street Journal set us straight. Click here.
Did you know ‘Renminbi — abbreviated RMB — is the formal term most often used by Chinese officialdom to refer to the currency… Literally, it means “People’s Currency.”’