The world’s bounciest economies have the most undervalued currencies

ONE of the biggest inconsistencies in the global economy today is the fact that emerging Asian economies have rebounded faster than any other region (the gap between their average growth rate and that of developed economies is likely to hit a record high this year), yet most of their currencies have fallen since 2008 in real trade-weighted terms. By many measures—from The Economist’s Big Mac index to more sophisticated gauges—Asian currencies are among the world’s most undervalued.

Take China, the fastest-sprinting economy. In the three years to July 2008 the yuan climbed by 21% against the dollar. But for the past 14 months it has, in effect, been repegged to the dollar. As a result the slide in the greenback has dragged down the yuan’s trade-weighted value by almost 10% since the start of this year (see chart). Morris Goldstein and Nicholas Lardy of the Peterson Institute for International Economics estimated in July that the yuan was undervalued by 15-25%. Some smaller Asian currencies may be even more undervalued. The IMF calculated in March that by one measure South Korea’s won was 41% below its fair value (its trade-weighted value has since gained about 10%). …