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Foreign experts warn against sharp appreciation of yuan

(Xinhua)
Updated: 2010-11-15 14:28

BEIJING -- The reform of China's exchange rate regime for its currency, the renminbi (RMB), has to proceed with caution to avoid a "big shock" to the world economy, foreign experts said Monday.

"There is a perfectly good reason for China to sustain the appreciation of the RMB not making a big shock," Martin Wolf, chief economics commentator at the Financial Times newspaper, told Xinhua.

"Reforming the exchange rate regime is not a policy that can be taken separately. I accept there is a transitional problem and it has to be seen as a multi-year policy," Wolf said on the sidelines of the third annual Globalization and Economic Policy Center (GEP) conference in Ningbo, Zhejiang province.

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The reform of the exchange rate regime is such a complex issue it can't be seen in isolation, said Wolf. "It has to be fit in with China's wider restructuring of the economy, the reform of financial sector and the policy of expanding domestic demand."

"In terms of the choices, about the timing, the speed, and the size of yuan's appreciation, China should try to move to what it is more likely to be an equilibrium level over years," he said.

Since China's central bank announced on June 19 it would reform the exchange rate formation mechanism of the RMB, also known as the yuan, the Chinese currency has appreciated three percent.

"The Chinese government is quite right not to make big shocks, as the real exchange rate regime is intimately related to a country's capital account policies and many other fundamental issues," Wolf said.

Wolf identified several undesirable consequences of a sharp rise in the yuan.

As China is the world's largest consumer goods exporter, a sharp appreciation of the yuan would push up the prices of China's exports, which would have a diversified effect on consumers, he said.

He said there would be losers if a sharp appreciation of yuan occurs. "It would be bad for the real income of many consumers in the West and some of the cost would have to be borne by multi-national companies," said Wolf.

"So it is a question of timing, and it's important that any such policy occur over years," he said.

John Ross, a visiting professor at Shanghai Jiaotong University, also sounded the alarm on the damage that a sharp one-time appreciation of the RMB would bring.

"A large rapid rise in the RMB's exchange rate, of the type of a 20 percent increase, as called for by some in the US, would be extremely damaging for both China and the world economy," said Ross, who also served as director of economic and business policy for the mayor of London, Ken Livingstone, from 2000 to 2008.

"It would produce a crisis in China's exporting industries and therefore lead to a rapid slowdown in China's imports -- as such a high proportion of China's imports are inputs into its exports," Ross said.

This would therefore lead to an economic slowdown not only in China but in other countries. "Simultaneously, such a sudden rise in the exchange rate would send an inflationary shock through the world economy as it would lead to a sharp rise in China's export prices under conditions where China is the world's largest exporter," he said.

Ross said "ensuring steady and rapid economic growth" should be the main priority of Chinese authorities.

"Sustaining this growth is also the greatest help China can give to the world economy as the expansion of China's economy ensures the rapid growth of China's imports from other countries," he said.

Ross said the call for a sudden and large rise in the value of yuan smacked of malice.

"'Neo-con' circles in the US who call for a sudden and large rise in China's export prices merely hope to damage China's economy in the way Japan's was damaged by the rapid rises in the exchange rate of the yen in the 1970s and 1980s," said Ross.

"As they are unable to 'murder' China in fair economic competition they invite it to commit economic 'suicide' in the way Japan did," he said.

Such a policy would damage not only China - it would slow down the whole world economy, he added.

"Therefore it is to everyone's benefit that China has refused to follow such a path," he said.

Ross urged the Chinese authorities to proceed with the reform of the exchange rate regime in a way that gives all economies and companies, not just China's, the ability and time to adjust.

"The correct policy, not only for China but for the world economy, is to continue the path China's government is pursuing - that is, a gradual and relatively smooth rise in the exchange rate of the RMB," he said.

Chinese President Hu Jintao reiterated last week during the G20 Summit in Seoul in the Republic of Korea (ROK) that "China will continue to steadily push forward the reform of the RMB exchange rate formation mechanism in a self-initiated, controllable and gradual manner."

Even a gradual appreciation of yuan in a controllable manner is not without risks, the two experts told Xinhua.

Hot money will attempt to enter China to take advantage of a predictable increase in the exchange rate, and this will increase with the US launching of a new round of quantitative easing (QE2), said Ross.

"But these negative side effects are less serious, and more controllable, than the damage that would result from a sudden large increase in the RMB exchange rate."