RENMINBI EXCHANGE RATES Institutional Factors In examining price exchan ge rates in all countries. we observe that the currencies of most developing countries have been undervalued in terms of purchasing power parity--that is, a PPP dis count exists for developing countries. However, PPP does not have a strong explanatory power on exchange rate movements for rather complicated reasons. Among the reasons for such a discount, I would like to emphasize the legal and judicial system-such as property rights protection, social order and security issues, education level, and the environment. Those factors, in addition to commodity qual y, currency convertibility, tariffs, and transportation costs, help to explain the PPP discount of a developing country. China has stepped into the global economic limelight in recent years chiefly because of institutional factors. These include(1)imple- mentation of reform and opening-up policies over the past three decades, (2)establishment of a market-oriented economy system, ( 3) launch of a scientific development principle and adherence to the idea of a harmonious society, (4)greater respect for the rule of law and intellectual property rights, and (5) promotion of energy conser vation and environment protection. All these endeavors have trans formed the world's perception of China, and thus enhanced the value of Chinese products, real estate, and human resources. In short, Chinese assets and products are becoming more and more valuable as a result of significant institutional changes At present, the costs of Chinese labor and raw materials are rela- ively low, Chinese commodities are available in good quality and low prices, and assets in China are likely to appreciate. Therefore, the rest of the world has an enormous demand for Chinese products uch demands have led to China's surging trade surpluses, high rates of investment, more than $1.6 trillion of foreign exchange reserves, resulted in market disequilibria ey and credit. All these factors have and relatively fast growth of mone The Effective RMB Exchange Rate Is Adjusting As many have noted, the effective RMB exchange rate is on the low side. Yet, I have reason to believe that the rmb exchange rate is moving toward equilibrium.Renminbi Exchange Rates 193 Institutional Factors In examining prices and exchange rates in all countries, we observe that the currencies of most developing countries have been undervalued in terms of purchasing power parity—that is, a PPP dis￾count exists for developing countries. However, PPP does not have a strong explanatory power on exchange rate movements for rather complicated reasons. Among the reasons for such a discount, I would like to emphasize the legal and judicial system—such as property rights protection, social order and security issues, education level, and the environment. Those factors, in addition to commodity qual￾ity, currency convertibility, tariffs, and transportation costs, help to explain the PPP discount of a developing country. China has stepped into the global economic limelight in recent years chiefly because of institutional factors. These include (1) imple￾mentation of reform and opening-up policies over the past three decades, (2) establishment of a market-oriented economy system, (3) launch of a scientific development principle and adherence to the idea of a harmonious society, (4) greater respect for the rule of law and intellectual property rights, and (5) promotion of energy conser￾vation and environment protection. All these endeavors have trans￾formed the world’s perception of China, and thus enhanced the value of Chinese products, real estate, and human resources. In short, Chinese assets and products are becoming more and more valuable as a result of significant institutional changes. At present, the costs of Chinese labor and raw materials are rela￾tively low, Chinese commodities are available in good quality and low prices, and assets in China are likely to appreciate. Therefore, the rest of the world has an enormous demand for Chinese products. Such demands have led to China’s surging trade surpluses, high rates of investment, more than $1.6 trillion of foreign exchange reserves, and relatively fast growth of money and credit. All these factors have resulted in market disequilibria. The Effective RMB Exchange Rate Is Adjusting As many have noted, the effective RMB exchange rate is on the low side. Yet, I have reason to believe that the RMB exchange rate is moving toward equilibrium