Yuan's appreciation no great help for US economy

NEW YORK - The appreciation of the Chinese currency, the yuan, would not be a great help in reducing the US trade deficit and creating jobs, a Chinese economist said?in New York?Monday.

Yao Yang, director of the China Center for Economic Research (CCER) at Peking University, made the remarks at a forum titled "China's economy in 2011: Forecast and Analysis from Leading Chinese Economists."

"As the two countries are the two biggest trade partners in the world, neither China's nor the US' economic issues are merely domestic. Instead, it's global," Yao said.

China's trade surplus with the United States in 2007 stood at $206.6 billion, and it declined to $143.4 billion in 2009 due to shrinking external demand in the wake of the global financial crisis.

But Yao pointed out that 44 percent of the surplus was contributed by US companies operating in China, and 20 percent by other foreign companies there.

Yao took iPhone, a personal electronic device designed by the US Apple Inc, as an example. He said, the product, assembled in China, alone accounted for $1.9 billion of China's trade surplus with the United States in 2009.

"Most of China's trade with the US is compensation trade, which may account for 60 percent of the total (bilateral) trade," Yao said. "The yuan's appreciation may somewhat increase China's trade surplus, contrary to the common sense."

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It means China can import raw materials and equipment at relatively low prices, he added.

Even if China is forced to give up exporting some of its products once the yuan appreciates, the United States will still have to buy those products, which it usually does not manufacture, from other countries -- which neither helps bring down its trade deficit nor create jobs, he said.

According to a CCER model co-developed with a US institution, if the yuan appreciates by 5 percent against the dollar, the US employment rate will rise by only 0.03 percent; even if the yuan appreciates by 20 percent, it only helps to raise US employment by 0.16 percent.

The effects of the yuan's appreciation on stimulating consumption are even smaller. According to the model, US consumption will be up a mere 0.02 percent, given a 5-percent appreciation of the Chinese currency against the dollar.

Meanwhile, the model showed that the increase in the yuan's value is unlikely to affect the US gross domestic product (GDP) much -- if the yuan rises by 5 percent, the US GDP would go up 0.02 percent, while China's GDP would contract 0.56 percent.

"In general, our research shows that the impact of the yuan's appreciation on the economies of China and the US is minor. The attempt to fix US economic problems by urging the yuan to appreciate is not effective," Yao said.