Op-Ed Contributors

Inflated yuan a far-reaching fix

By Wang Guanyi (China Daily)
Updated: 2010-05-05 08:12

China has its own renminbi agenda that is largely founded in economic stability. As President Hu pointed out on the first day of the Nuclear Security Summit, any action must be based on China's own steps to develop the economy. The peg against the dollar at 6.83 renminbi was just one of the numerous policies to cope with the global economic crisis.

The primary goal of China is to boost both the public and private sectors and not to "manipulate" a currency or export the problem to its trading partners. Nevertheless, given the significant size, exports remain crucial to the Chinese economy. Any significant appreciation of the renminbi will erode China's export competitiveness overnight and impact the livelihood of tens of millions of workers.

Any change in Chinese currency policy has to help the government's target GDP growth at a pace of 8 percent per year and the nation's determination to contain the consumer price index. The stimulus package has successfully boosted the Chinese economy. However, with the global economy looming with uncertainties, the Chinese government should not slow down the economic engine nor let inflationary pressures threaten the livelihood of the population. Demands in raw materials, accompanied by the credit expansion have already fueled the consumer price index. The central government has to maneuver its monetary policy delicately to cope with liquidity. While the gradual lifting of interest rates and bank reserve requirements help to moderately cool off the economy, a sizable liquidity is still flowing over to the equity and property markets.

Consumer prices rose 2.7 percent year-on-year in February, which is a significant climb from 1.5 percent in January. A slightly stronger renminbi might ease some of the inflationary pressures to the benefit of the overall economy, and the government has studied this option. But that would largely depend on weighing the losses to exporters against boosting domestic consumer spending in the hopes of minimizing the impact to society. China is aiming to avoid the painful lesson of the yen's appreciation during the '80s.

If the central government changes the currency policy, China will likely allow a limited flotation of the renminbi against the dollar, or appreciate the currency at a reasonable pace not exceeding 5 percent against the dollar within the next 12 months. Of course, this is based on the government's own estimation of how fast the nation can absorb the losses in exports with the gains in Chinese consumers.

The author is a visiting professor at Asia International Open University, founder of wongsir.com.hk and chief strategist of Crown One Asset Management.