Official and effective, actual and nominal, bilateral and multilateral.
First, let’s compare nominal inflation to adjusted inflation.
figure 1: Official bilateral nominal USD/CNY exchange rate, period average (blue, left scale), log bilateral real exchange rate (tan). The NBER uses shades of grey to define the peak and trough dates of the recession. “Down” is the devaluation of the renminbi. Source: FRED, NBER and author’s calculations.
Second, let’s consider the difference between the official exchange rate and the exchange rate at which the transaction takes place. In advanced economies they are usually the same; many developing countries are not. In China, this distinction becomes important because the “massive devaluation” observed in 1994 was in part a product of the use of the official exchange rate. Fernald, Edison and Loungani (1999) Note that many transactions take place through exchanges. Using their series produced a less dramatic drop in 1994.
figure 2: Official bilateral real USD/CNY exchange rate, period average (tan), and bilateral exchange rate adjusted for swap center rates used prior to 1994 (red). The NBER uses shades of grey to define the peak and trough dates of the recession. “Down” is the devaluation of the renminbi. Source: FRED, Fernald, Edison, Loungani (JIMF, 1999), NBER and author’s calculations.
There are two aspects worth paying attention to here. First, the RMB appreciation trend using the official exchange rate is basically zero. However, using the swap center-adjusted exchange rate, the renminbi appreciated by about 1% per year during this period (estimated using first-order differences).
Second, if the official exchange rate is used (10% rejecting the Elliott-Rothenberg-Stock unit root test, but also 1% rejecting the Kwiatkowski-Phillips-Schmidt-Shin trend stationarity test), the real exchange rate may appear to be leveling off, but it is clear , I(1) uses the adjusted rate (fails to reject ERS, and rejects KPSS).
Third, and especially important now (see Sobel, 2022), bilateral and real exchange rates can differ significantly in direction.
image 3: Bilateral exchange rates are adjusted according to the swap center exchange rate (red) and the trade-weighted value of the RMB (blue-green) used before 1994, both expressed in logarithmic terms, 2000M01=0. Trade-weighted yuan against a basket of currencies. The NBER uses shades of grey to define the peak and trough dates of the recession. “Down” is the devaluation of the renminbi. Source: FRED, Fernald, Edison, Loungani (JIMF, 1999), Bank for International SettlementsNBER, and the authors’ calculations.
What is clear is that the recent devaluation of the renminbi is actually a devaluation of the dollar. Once a trade-weighted view is taken, the yuan is about the same level as it was in 2015 (adjusted for inflation).