Experts justify gradual rise in the yuan

NEW YORK - Leading Chinese economists said that the yuan will continue to gradually appreciate in the years to come at a seminar on the Chinese economy held at the New York Stock Exchange on Monday.

"You got 21 percent in three years and that's quite good," economist Fan Gang said to hundred of guests at the seminar, sponsored by the National Committee on United States-China Relations.

The two nations have tussled over the past year about revaluating the yuan, the Chinese currency. Many politicians in the US believe the yuan is undervalued. But Fan, director of the National Economics Research Institute - a nongovernment think tank - said the Chinese yuan appreciated by 5-7 percent each year from 2005-2008.

Yao Yang, director of the China Center for Economic Research at Peking University, said that the Chinese economy will not be drastically affected by a moderate appreciation of the yuan. A large appreciation of 20 percent, on the other hand, will hurt China while giving the US a miniscule boost, he added.

He said his studies show that a 5-10 percent appreciation will have a moderate impact on China's employment rate, consumption level and gross domestic product, while a 20 percent appreciation will strain these key markers considerably.

The relatively large impact on the Chinese economy from a 20-percent rise in value is "why China is resisting a large appreciation of the yuan," Yao said, adding that "both China and the US seem to bark up the wrong tree" because the US expects a large impact from an appreciation and the Chinese government is too cautious not to appreciate the currency.

Both Yao and Fan tried to convince the mostly American audience that China should not be blamed for the trade surplus between the two countries.

The bilateral trade surplus, which stood at $206 billion in 2007, declined to $143 billion in 2009 and is declining further. US companies operating in China contribute to about 44 percent of the surplus, they said.

"If we also include investors from other countries, China's trade surplus with the US is going to be only 36 percent of the number," Yao said.

Fan, a former adviser to the country's central bank, the People's Bank of China, said a decrease in trade surplus and China's current account surplus have been achieved without a drastic appreciation of the yuan. But he is worried about the impact on the Chinese economy from the US' recent quantitative easing and the subsequent capital inflow into China.

He said that because the US economy is still recovering from its recession with the US Department of the Treasury using a more expansionary policy, there are opportunities in emerging markets, including China.

As the US dollar depreciates, he added, expectations of a yuan revaluation will rise, with more speculative investment coming into China. In September of last year, China has seen its foreign currency reserve increase by $100 billion.

He added that the massive capital inflow occurred when China tried to remedy the oversupply of liquidity last year caused by its stimulus package and easing its money supply policy.

Excessive liquidity, which led to overheated growth and inflation, are dire issues in China, Fan said, adding that the central bank is trying to reduce the supply of money while dealing with the excessive capital inflows.

Fan said these factors will make it more difficult for China to "rebalance its external relationship with other countries", particularly with the US.

He also said that "we will see fiscal and taxation reform" to deal with China's high rate of savings, which stood at 52 percent in 2009.

Chinese State-owned enterprises, especially in monopolized industries, are being required to pay a higher percentage of their profits to State coffers. Social security reform will be implemented in the next five years and will include a broad pension system that includes migrant workers. China is also going to invest more in urbanization, which is expected to help reduce the surplus.

China Daily