Renminbi not undervalued as real exchange rate increases: UN expert

Updated: 2011-01-19 17:31
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GENEVA - The Chinese currency is not undervalued, if measured with Real Effective Exchange Rate (REER) based on Unit Labor Cost (ULC), a better way to grasp changes in competitiveness than looking at nominal exchange rate and REER based on Consumer Price Index (CPI), the United Nations Conference on Trade and Development (UNCTAD) said on Tuesday.

In a press conference presenting UNCTAD's recent surveys and findings, Heiner Flassbeck, Director of UNCTAD's Division on Globalization and Development Strategies, said according to his calculation based on the ULC oriented approach, the Chinese currency "is not undervalued", but rather, "it has appreciated quite significantly in the last ten years."

UNCTAD's findings showed there can be significant differences in the measurement of the real exchange rate, depending on whether it is calculated on changes in ULC, or the traditional basis of changes in CPI.

"The latter misses out important elements of the catching-up process of developing countries and may result in significant misinterpretation for some important emerging economies like China, " UNCTAD argued in its findings.

According to UNCTAD, China's ULC based REER nearly doubled since 1995, in contrast with the CPI based REER, which increased only around 30 percent, and the gap depicted a widening trend.

UNCTAD considers ULC a more reliable tool in calculating China' s REER, as more than 60 percent of all Chinese exports emanate from affiliates of foreign firms.

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The UN agency also attributed the trade imbalance between China and other nations primarily to FDI and foreign firms dominated export and import behavior, which gives foreign investors absolute competitive advantage and incredible margins by combining their high technology with cheap local labors.

"It is not China to be blame for this kind of development, because China can not force the firms to increase prices. If the wages are rising, China has done, so to say, its bit, to remove the current account imbalance," Heiner Flassbeck said.

"One should not look at the nominal exchange rate, as many people do, just look at the nominal exchange rate and say stable nominal exchange rate is a problem per se, it is not, if the real exchange rate increases," he added.