The Renminbi Dilemma: To Float Or Not To Float

Abstract

The purpose of this research paper is to analyze the Renminbi (the Chinese currency) and suggest whether or not the currency should be allowed to float. The paper makes use of four popular approaches to determine whether or not the currency is currently undervalued and if so, what mechanisms should be used to allow for its proper valuation. According to the purchasing power parity, balance of payments approach, and the asset management approach, the Chinese currency is undervalued and will therefore appreciate in the future. We believe that although floating of the currency is advisable for the long run, it will not be in the best interest of the Chinese economy in the short run given the state of its banking system in particular. Adopting a pure float will probably cause major macro and micro economic imbalances that will be difficult to tackle. Instead, we suggest a pegging of the Renminbi against a basket of currencies to ensure flexibility and stability in the system.