An analysis on movement of RMB-Dollar real exchange rate

This paper calculates the RMB-Dollar relative PPP based on yearly percentage change in RMB-Dollar real exchange rate, nominal exchange rate, and differentials in price index change rate. The results say that the real exchange rate is changing, and is driven by nominal exchange rate in some periods but was driven by bilateral difference in inflation rate in some other periods. The real exchange rate is undervalued relative to relative PPP. The paper argues that exchange rate policy and institutional factors are the main determinants of real exchange rate, and their impacts on real exchange rate have been salient when we observe the change in nominal exchange rate. The real undervaluation of RMB was directly impacted by China's cheap labor and natural resources. Nominal exchange rate will be better indicator of real exchange rate and long-term equilibrium level. In identifying the long-run impact of non-monetary factors behind real exchange rate determination, macroeconomic and structural policies will be made to enhance China's social and economic development, and satisfy the need for internal and external balance.