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Thursday, May 22, 2008

How much is RMB undervalued? A reconsideration

RMB (Chinese Yuan) was estimated by various studies undervalued by over 40%.  But the estimation was based on an obsolete World Bank PPP conversion number in 1980s. Several months ago, World Bank finally got their hands on the issue and revised the PPP number for China.  Now new estimates show RMB is only undervalued by 10%.  Read this analysis here.
 
What does this imply?
 
Chinese government finally got their revenge: I told you so, Paulson, we were not manipulating our currency!  The implication for the currency market is this: anyone who expects Yuan's appreciation will go on forever had better change their bet.