There are many dimensions to judge whether the RMB exchange rate is overvalued or undervalued. More theoretical is purchasing power parity. In different countries, the comparison of their purchasing power can be used as a theoretical standard for overvaluation and undervaluation of exchange rates.

It is relatively convenient to judge whether the RMB is overvalued or undervalued. At present, the domestic RMB is still the exchange rate formed by trading in a closed market. Trading is based on the principle of real demand, so theoretically, market supply and demand determine the trend of RMB exchange rate. However, the RMB exchange rate is sometimes interfered by the central bank, distorting the market-oriented formation mechanism of the exchange rate. Therefore, the current market exchange rate is inconsistent with the exchange rate determined solely by market supply and demand. As long as there is a substantial increase in foreign exchange reserves, it means that the central bank has suppressed the RMB exchange rate by buying a lot of dollars in the market, and the RMB exchange rate is undervalued; On the contrary, when the central bank's foreign exchange reserves fall sharply in a certain period of time, the RMB exchange rate is often overvalued.