Rmb Natural Equilibrium Exchange Rate Estimates Deviate From The Analysis

Since July 21st, 2005, RMB has kept appreciating steadily after the announcement of market based managed floating exchange rate mechanism with reference to a basket of foreign currency by the People's Bank of China. It is significant to decide the equilibrium exchange rate level for the realization of sustainable economic development and the stability of financial system.This article first reviews Methodologies and research fruits in regards to equilibrium exchange rate and RMB equilibrium exchange rate systematically, which form the basis of analyses of the factors that affect the RMB real exchange rate through Natural Real Exchange Rate theory. There are improvements on choosing and definition of variables, by Hisao selection method before formulating long term cointegration equation by Johansen cointegration test and data from 1978 to 2007 adjusted by Hodrick-Prescott Filter. Then we come to the conclusion that during 1978-1984, RMB is undervalued, while 1985-1987 overvalued, 1988-1989 undervalued, 1990-2002 overvalued and after 2002, undervalued. In general, from mid 80s to 2002, RMB is overvalued for most of the years, while since 2002, undervalued, and the margin is enlarging.On the basis of above analysis, we discussed the dilemma of RMB exchange rate adjustment as well as pros and cons of RMB appreciation, then reach the conclusion that we should promote with concrete steps the market based RMB exchange rate formation mechanism, and adjust industrial structure in order to solve internal and external imbalances.