Deutsche Bank: The Renminbi Is Not Undervalued; Gradual Appreciation Is Preferable to a One-Time Revaluation
A Deutsche Bank research report says the market’s central misunderstanding about the renminbi is the conflation of a current-account gap with currency undervaluation.
A Deutsche Bank research report says the market’s central misunderstanding about the renminbi is the conflation of a current-account gap with currency undervaluation. The IMF’s estimated -21.3% real effective exchange-rate gap reflects only the theoretical appreciation required to eliminate a current-account surplus; it is not a direct estimate of renminbi undervaluation.
The IMF’s direct valuation models show the renminbi as either 2.7% undervalued or 0.5% overvalued. Deutsche Bank’s independent estimate also puts the degree of undervaluation at only 3%-8%.
The report says China’s current-account surplus is driven mainly by excess domestic savings, excess capacity and cost advantages resulting from gains in real productivity, rather than by a currency mismatch. It therefore argues that a one-time, large-scale revaluation would not be an effective solution.
Instead, the report highlights using domestic-demand measures—including stabilizing the property market, expanding household consumption and increasing infrastructure investment—to support gradual appreciation, alongside global productivity convergence and a multi-year structural adjustment.
The report’s conclusion is that the renminbi is not deeply undervalued, making a one-time sharp appreciation the wrong policy response. It identifies gradual appreciation combined with domestic reflation as the preferred path.
The note says the potential beneficiaries of gradual renminbi appreciation would include renminbi-denominated assets such as A-shares, Hong Kong stocks and Chinese bonds, while export-oriented companies could be hurt. It adds that current market concerns about renminbi undervaluation may be excessive and that the gradual-appreciation path has not yet been fully priced in.
The report identifies three catalysts: the pace of domestic reflation policies; progress in U.S.-China trade negotiations and related political pressure on the renminbi; and changes in China’s current-account surplus.
The IMF’s direct valuation models show the renminbi as either 2.7% undervalued or 0.5% overvalued. Deutsche Bank’s independent estimate also puts the degree of undervaluation at only 3%-8%.
The report says China’s current-account surplus is driven mainly by excess domestic savings, excess capacity and cost advantages resulting from gains in real productivity, rather than by a currency mismatch. It therefore argues that a one-time, large-scale revaluation would not be an effective solution.
Instead, the report highlights using domestic-demand measures—including stabilizing the property market, expanding household consumption and increasing infrastructure investment—to support gradual appreciation, alongside global productivity convergence and a multi-year structural adjustment.
The report’s conclusion is that the renminbi is not deeply undervalued, making a one-time sharp appreciation the wrong policy response. It identifies gradual appreciation combined with domestic reflation as the preferred path.
The note says the potential beneficiaries of gradual renminbi appreciation would include renminbi-denominated assets such as A-shares, Hong Kong stocks and Chinese bonds, while export-oriented companies could be hurt. It adds that current market concerns about renminbi undervaluation may be excessive and that the gradual-appreciation path has not yet been fully priced in.
The report identifies three catalysts: the pace of domestic reflation policies; progress in U.S.-China trade negotiations and related political pressure on the renminbi; and changes in China’s current-account surplus.