RMB equilibrium exchange rate and misalignment: Insights from the CN-NATREX Model

• Constructed a new CN-NATREX model adding long-term international competition factors. • Estimated the CN-NATREX model using Mplus 8.0 and FIML to analyze RMB misalignment. • Found 2013–2014 was a shift from persistent undervaluation to overvaluation. • Revealed a left-skewed inverted 'U' in RMB overvaluation post-adjustment. • Emphasized government policy's strong impact, recommending timely intervention. This study builds a RMB natural equilibrium exchange rate (CN-NATREX) model to evaluate the impact of intensifying international competition on the RMB’s NATREX and misalignment. Using China’s data, we confirm the model’s robustness, obtaining dynamics of equilibrium and competition. Results indicate that the RMB underwent an adjustment period from 2013 to 2014. Before this period, the RMB was undervalued; subsequently, it became significantly overvalued, with a misalignment forming a left-tailed inverted U. The findings strengthen the NATREX framework, offering an innovative approach for exchange rate policy amid complex global economic dynamics.