Abstract: Based on the theory of equilibrium real exchange rate, this paper estimates the behavioral equilibrium exchange rate and the resulting misalignment in China. Evidence shows chronic overvaluation in China’s central planning period, but economic reforms have brought the real exchange rate closer to equilibrium. The cumulative effect of exchange rate reform led to a substantial real depreciation of the Chinese currency after 1981. Indications are that China now has a proactive exchange rate policy with the nominal exchange rate used as a policy tool to attain real targets.

J. Comp. Econ., March 2001, 29(1), pp. 80–94. St. Antony’s College, Oxford University, Oxford OX2 6JF, England. C° 2001 Academic Press

Journal of Economic Literature Classification Numbers: C13, C32, F31, P21, P33.

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