Mundell: China should keep currency peg
(Agencies)
Updated: 2005-06-03 20:14

Nobel economics laureate Robert Mundell, known as "father of the euro" for his contributions to foreign exchange theory, said Friday there is no reason for China to change its much-criticized currency peg to the US dollar.

"My position, since 1994, has been strongly against changing the exchange rate," Mundell said in a lecture organized by the Chinese University of Hong Kong. "China has had a dollar anchor for over 10 years, and it's a winning policy."

China strictly controls its currency's exchange rate with a de-facto peg of 8.28 yuan to the US dollar. Washington has strongly argued that the rate is too low and has fueled the ballooning US trade deficit _ an argument also taken up by US businesses hurt by Chinese competition, such as textile makers.

Mundell argued, however, that any change by China _ whether a one-off revaluation of the exchange rate or a shift to a floating rate _ wouldn't be in China's own interests, and would in fact have little effect on the root causes of America's dissatisfaction.

"Behind this there is a real phenomenon: China's competitive shock," he said, comparing the recent growth of low-cost manufacturing in China to Japan's economic rise in the 1950s and 1960s. But Mundell said this shock "isn't a monetary issue and can't be addressed by monetary measures," such as the exchange rate.

He echoed an argument made by a number of other prominent economists, such as US Federal Reserve Chairman Alan Greenspan and fellow Nobel Prize-winner Joseph Stiglitz. They contend that while a revaluation would make Chinese goods more expensive in the US, American consumers would just buy imports from other low-cost countries instead. In that case the US trade deficit with China might fall, but the size of its overall trade deficit would not.

Mundell also argued that a change in the currency regime would bring "damaging" volatility to China, and it could harm growth and employment in the domestic economy. Chinese officials, while saying their long-term goal is a more flexible exchange rate mechanism, have consistently resisted pressure for a quick move by arguing that it would endanger the country's immature still-fragile financial system.

Mundell advised China to hold its dollar peg steady and continue its gradual reforms of the economy to bring in market forces and foreign investment.

"If China perseveres with its (currency) policy, while continuing to open up the economy and meet its WTO commitments, it will gain acceptance of it," he said.

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