Motivations and strategies for a real revaluation of the Yuan

Most Western economists and policy makers agree that the Yuan is significantly undervalued and push the Chinese government for a large nominal revaluation of the Yuan. This paper, while surveying recent research on Chinese exchange rate policy, gives some new insights into this issue. Notably, this paper defends that China is not solely responsible for the Yuan’s undervaluation, the Chinese central bank cannot optimally invest an increasing amount of foreign currency reserves, and the Yuan’s nominal revaluation is not the only way to resolve the problem. After having analyzed the advantages and disadvantages of a nominal versus a real revaluation of the Yuan for the Chinese economy, I advocate and analyze, besides a modest nominal revaluation, a multitude of alternative policies to achieve a complete revaluation of the Yuan in real terms, which allows absorbing external disequilibrium while laying down the foundation for the long-term growth of the Chinese economy.