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Cover Story Series> Business
UPDATED: April 2, 2010 NO. 14 APRIL 8, 2010
No Hasty Appreciation

The value of the reminbi (yuan), the Chinese currency, has once again become the target of criticism.

America's huge trade deficit with China, its nearly 10-percent unemployment rate, and an imbalance in the global economy have all been attributed to the "undervalued" yuan by many U.S. senators, who complain the yuan is undervalued by as much as 40 percent. Paul Krugman even said global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of the yuan.

But these assertions are totally untenable. Assume that the yuan appreciates abruptly by, say, 40 percent. Chinese exporters would suffer a heavy blow and fail to export. A collapse of the export sector will directly decelerate the growth of the world's third largest economy. This would only present problems for the rest of the world, since most major economies are still struggling to recover. Meanwhile, the U.S. unemployment situation couldn't be alleviated since products from other low-cost countries would soon flood the U.S. market in the absence of Chinese exports, still beating U.S. manufacturing.

Even if China were to export to the United States at higher prices but for lower profits, it could substantially push up inflation rates in the United States, resulting in tightened monetary policy by the U.S. Federal Reserve. This would also undermine the shaky U.S. economy.

Hence, a sharp appreciation of the yuan would neither help create jobs in the United States, nor boost the world economy as expected. On the contrary, it would bring uncertainties and dent investors' confidence.

A crystal clear fact is that China's efforts on keeping the yuan stable have contributed to the global economic recovery, indicating that it has always been a responsible player in the international community.

Amid the global recession, while all other currencies depreciated against the dollar, the yuan hasn't, similar to what China did more than a decade ago after the outbreak of the 1997 Asian financial crisis. Last year, during the worst period of the downturn, it even appreciated a little against the dollar, causing the Obama administration to admit that progress was being made.

And China maintaining the yuan at a rational level does not necessarily mean a freeze in its exchange rate. China unpegged the yuan against the U.S. dollar in 2005, and began adopting a managed, market-based and floating exchange rate regime. The pace of this change hinges on the country's economic conditions. That is the reason why the country should subdue any external pressure on the sharp appreciation of its currency, which would be no good to either China's development or the world's.

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