CATO JOURNAL baht and the Indian rupee) or have actually depreciated. In some cases(the Malaysian ringgit, the Japanese yen, and the Taiwanese dollar), the depreciation has been large despite sizable current ac- count surpluses. If the Asian currencies do not lead the way in the needed second wave of dollar depreciation, either the resulting over all depreciation of the dollar will be too small, or the burden of appreciation will fall heavily on economies where a further large appreciation would not be warranted by their economic circum tances (see Goldstein 2005) Under the global payments approach, China is a prime candidate for significant real currency appreciation: it has experienced massive reserve accumulation equal to 10 percent of GDP over each of the past three years; its real, trade-weighted exchange rate has depreci ated over this period; and it has now recorded 10 successive quarters of 9 percent plus economic growth. Moreover, an appreciation of the RMB would likely induce some appreciation in some other Asian lIrrencles To sum up, the message I take away from these approaches to assessing the equilibrium value of the RMB is that it remains signifi cantly undervalued on a real, trade-weighted basis--on the order of 20-35 percent. A wholesale liberalization of controls on capital out flows could wipe out most of this undervaluation, but the fragile state of Chinas banking system makes this policy neither desirable nor likely for the next several years. True, there are other approaches to valuing the RMB (e.g, purchasing-power-parity calculations, struc tural models of the RMB, and VAR models), and there are other ad current accounts and normal capital flows. None of those approache. hoc adjustments one could make to obtain estimates of underly however, yields results persuasive enough and dif fferent enough to overturn the large undervaluation verdict. 10 TheJ. P. Morgan and Citigroup indexes of real effective exchange rates differ substantially from each other on the recent movements of the Singapore dollar and Philippine pe tRuman(2005) considers various scenarios for reducing the U.S.curr unt deficit to 3 percent of GDP, including one where Asian currencies lead the second wave of app ciation against the U.S. dollar. In that latter scenario, the RMB appreciates in real trade- weighted terms by 17 percent and by 41 percent against the dollar. ng an approach that focused on restoring medium-term equilibrium to the"basic balance"in Chinas balance of payments, Anderson(2005b) calculated that the RMB was undervalued (on a real effective basis) by about 25 percent. Cline(2005)finds that the RMB is undervalued by 21 percent on a real trade-weighted basis from its March 2005 level nd is undervalued by 46 percent in real terms against the U.S. dollar relative to a 2002 Many of these studies are reviewed in Cheung, Chinn, and Fujii(2005)baht and the Indian rupee) or have actually depreciated.7 In some cases (the Malaysian ringgit, the Japanese yen, and the Taiwanese dollar), the depreciation has been large despite sizable current ac￾count surpluses. If the Asian currencies do not lead the way in the needed second wave of dollar depreciation, either the resulting over￾all depreciation of the dollar will be too small, or the burden of appreciation will fall heavily on economies where a further large appreciation would not be warranted by their economic circum￾stances (see Goldstein 2005).8 Under the global payments approach, China is a prime candidate for significant real currency appreciation: it has experienced massive reserve accumulation equal to 10 percent of GDP over each of the past three years; its real, trade-weighted exchange rate has depreci￾ated over this period; and it has now recorded 10 successive quarters of 9 percent plus economic growth. Moreover, an appreciation of the RMB would likely induce some appreciation in some other Asian currencies. To sum up, the message I take away from these approaches to assessing the equilibrium value of the RMB is that it remains signifi￾cantly undervalued on a real, trade-weighted basis—on the order of 20–35 percent.9 A wholesale liberalization of controls on capital out￾flows could wipe out most of this undervaluation, but the fragile state of China’s banking system makes this policy neither desirable nor likely for the next several years. True, there are other approaches to valuing the RMB (e.g., purchasing-power-parity calculations, struc￾tural models of the RMB, and VAR models), and there are other ad hoc adjustments one could make to obtain estimates of underlying current accounts and normal capital flows. None of those approaches, however, yields results persuasive enough and different enough to overturn the large undervaluation verdict.10 7 The J. P. Morgan and Citigroup indexes of real effective exchange rates differ substantially from each other on the recent movements of the Singapore dollar and Philippine peso. 8 Truman (2005) considers various scenarios for reducing the U.S. current account deficit to 3 percent of GDP, including one where Asian currencies lead the second wave of appre￾ciation against the U.S. dollar. In that latter scenario, the RMB appreciates in real trade￾weighted terms by 17 percent and by 41 percent against the dollar. 9 Using an approach that focused on restoring medium-term equilibrium to the “basic balance” in China’s balance of payments, Anderson (2005b) calculated that the RMB was undervalued (on a real effective basis) by about 25 percent. Cline (2005) finds that the RMB is undervalued by 21 percent on a real trade-weighted basis from its March 2005 level and is undervalued by 46 percent in real terms against the U.S. dollar relative to a 2002 base. 10Many of these studies are reviewed in Cheung, Chinn, and Fujii (2005). CATO JOURNAL 254