Estimation of the Undervaluation of the Chinese Currency by a Non-linear Model

This paper conducts a quantitative estimation for the equilibrium value of the Chinese currency, the RMB, by a non-linear model, after control of the Balassa-Samuelson effect. The model provides a better fit for the valuation of the Chinese Currency than the conventional linear or log linear Rogoff models. The model regression is robust. Our regression reveals that the RMB was undervalued by 32% in 2004, but further increased to 35.8% in 2005 because the Balassa-Samuelson effect diminishes as China's economy Surges. These figures suggest that the extent of undervaluation of RMB is more substantial than most previous estimates, which range from 15% to 27.5%. The estimates of the model provide important information about the likely changes in the value of the RMB in the near future.