An RMB appreciation?

There's a small piece over at voxeu on the appreciation of the renminbi (rmb). I think all the banter that went to and fro on the valuation of the rmb seems to have cooled down after the election cycle but also because the rmb has appreciated significantly over the last few years especially in real terms:

You have to be careful when you discuss issues of manipulation, fairness and the like. Far from it being a mathematical issue, there are opinions everywhere on conceptually disputing this. Some of the thinking is that when looked at from a savings-investment dynamic point of view, the accumulation of foreign reserves that China is so famous for - essentially is a reflection of distortions and imperfections in the domestic financial market. The authors in this case, try and link an expected gradual decline in savings with an appreciating currency as opposed to the Balassa-Samuelson approach of productivity differentials.

In fact, if one considers a semi-open economy (China's has a restricted capital account), then theoretically I could see inconsistencies with being able to keep an exchange rate undervalued over the long term. If higher savings is linked to the CA surplus (CA = S - I after all), then an undervalued nominal rate would persistently boost exports and feed back into the economy in the form of higher domestic price levels and wage pressure as well. Eventually, the real effective rate would have to normalize.

Without the free flow of capital, the balance of foreign reserves becomes a reflection of what's happening in the current account. So the central bank can accumulate international reserves and finance them by issuing domestic saving instruments that boost private saving further. The key here, as should be noticed by now is where the adjustment lies. Without a completely open capital account, domestic interest rates will factor into the necessary adjustment.