Assessment on Valuation of RMB

While RMB is pegged to the US dollar, the exchange rate between RMB and the euro is not fixed, due to that the exchange rate between the euro and the US dollar is not fixed. Since RMB is not a small currency, its peg to the US dollar would have at least two profound effects on the foreign exchange market, assuming that market forces are working to a certain extent. One is that the RMB monetary authority can achieve neither undervaluation nor overvaluation of RMB against all currencies by undervaluing or overvaluing RMB against the US dollar. The other is that the peg of RMB to the US dollar would force the exchange rate between the US dollar and the euro to depart from a “fair” market determined rate if the exchange rate between the US dollar and RMB is not set right. Consequently, the peg achieves neither overall undervaluation/overvaluation of RMB against all currencies nor stability in RMB exchange rates, except for instituting distortions on the foreign exchange market. Our analysis suggests that when RMB is overvalued relative to the US dollar, the euro would tend to be overvalued relative to the US dollar too, and vice versa. Inversely and likewise, an overvalued euro currency vis-à-vis the US dollar would imply a kind of overvaluation of RMB vis-à-vis the US dollar. The study further translates the mathematical analysis into an econometric testing procedure, providing an empirical assessment with supporting results