Opinion

US would pay for strong yuan

By Yang Ning, Lan Lan (China Daily)
Updated: 2010-04-06 10:53

BEIJING: As American legislators are increasing pressure on China to revalue its currency, a renowned British economist urged the United States to look at China's changing role more openly and pragmatically.

"The US is shortsighted (in pressing yuan appreciation). It has to recognize China's new role on the world stage and it has to find a way to live together with China instead of pushing China away," said Giles Chance, a UK-based economist and visiting professor at Guanghua School of Management at Peking University.

Still, the appreciation of the yuan would not help cut the US trade deficit with China as Washington claims, but in fact have the opposite effect, he told China Daily.

Chance said: "The assumption is that if Chinese products become more expensive, then Americans would buy less or stop buying. But that is definitely not going to happen because most Chinese products are basic necessities for Americans." US would pay for strong yuan

If China adjusts the yuan sharply higher, the final result would be a widened US trade deficit with China, and US consumers would be the "victim" as a stronger yuan will cost them more, not less, he said.

Chance's argument is backed up by bilateral economic trends in recent years. While the yuan appreciated by 21 percent against the US dollar from 2005 to 2008, the US trade deficit with China actually increased. In 2005, it was $114.17 billion while in 2008 it surged to $170.86 billion, despite the yuan's sharp appreciation.

According to Chance, the right way to tackle the problem of the US trade deficit is to adjust the structure of both economies.

"The Chinese have to change the (structure of their) contribution to growth, which means further boosting domestic consumption, while Americans have to save more."

He also said that the exchange rate of the yuan eventually needs to be more liberalized and more market-oriented. "That will be helpful for China," he said.

From July 2005, China has allowed the yuan's value to fluctuate within a 0.3 percent range - later expanded to 0.5 percent - under its managed floating exchange rate regime. But Chinese policymakers have made it clear that they want to make it more flexible based on market supply and demand conditions.

Richard Herd, senior economist with the Organization for Economic Cooperation and Development, said China has not called a permanent halt to yuan appreciation, as clearly indicated by Premier Wen Jiabao and central bank Governor Zhou Xiaochuan.

"China would start with gradual appreciation again because I think the policy of gradual appreciation has been suspended rather than ended," he told China Daily.

"I think it will start again probably after July, which will be helpful from the point of view of keeping inflation under control."

Chance said that China is not yet ready for faster appreciation, adding that Beijing is correct to allow changes in its currency policy to proceed at a gradual pace.

Some US legislators have been demanding that Washington labels China a "currency manipulator" in a US Treasury report due out in mid-April, which could set the stage for possible surcharges on Chinese goods entering the US. Chance said that this "is not correct".

"If the US government does label China as a 'currency manipulator', then by law, they have to respond and take action against China. Accordingly, China has to respond to America's unreasonable and aggressive behavior."

"It will damage China-US relations for certain" at a time when China has started to play a greater role in global affairs, he said.

The global credit crisis has pushed China from behind America's shadow and into a central position on the world stage.

As Chance said in his book China and the Credit Crisis: The Emergence of a New World Order, the new role China will play in the post-crisis world is as a provider of growth to a world deep in recession and, further into the future, as a central player in international affairs and macroeconomic management.

"The heated debate over China's currency policy around the world is kind of a reflection of a new world order," he said.

"The bottom line is that US, as well as other foreign countries, have to realize China's position is changing, and it will go on changing," he said.