UN agency, experts refute yuan revaluation

A revaluation of the Chinese yuan as recently demanded by the United States won t solve world trade imbalance and may even endanger the world economy, experts and a UN agency said.

The burden of rebalancing the global economy should not be put on a single country and its currency, the United Nations Conference on Trade and Development (UNCTAD) said Tuesday.

Expecting that China will leave its exchange rate to the mercy of totally unreliable markets and risk a Japan-like appreciation shock ignores the importance of its domestic and external stability for the region and for the globe, the UN agency said in a policy brief. A loss in China's competitiveness as a result would produce dangerous consequences for the world, it said.

Under the pressure of the election year and high unemployment, five U.S. senators Tuesday proposed legislation on stiff penalties against China in case it fails to boost the value of its currency.

This is part of a series of outcries by U.S. lawmakers against what they said was a deliberately undervalued yuan. On Monday, 130 U.S. congressmen wrote to the government, demanding the Obama administration take actions to appreciate the yuan against the dollar.

However, UNCTAD noted that both absolutely fixed/pegged and fully flexible/floating exchange rate systems were "suboptimal." Experience shows that these corner solutions helped cause volatility and aggravated global imbalances.

According to the UN agency, as a response to the current global crisis that originated elsewhere, China has done more than any other emerging economies to stimulate domestic demand. And, as a result, its import volume has expanded significantly.

Chinese private consumption increased at a breakneck speed of 9 percent in 2009 in real terms, dwarfing all the other major countries attempts to revive their domestic markets, it said.

The tensions against the Chinese yuan came one month before the U.S. Treasury Department is to decide again whether to label China a currency manipulator in a semiannual report to the Congress.

President Barack Obama urged China last Thursday to adopt a more market-oriented exchange rate, or to allow the yuan to be strengthened.

Obama s pressure on China over its currency's exchange rate is a manifestation of hypocrisy from the West and will not work, said a British economist.

The president is playing with fire ... Obama really should tread carefully. At the same time, the United States is now at risk of sparking what could be an all-out trade war, Liam Halligan said in an article in this week s Sunday Telegraph.

Halligan, chief economist at Prosperity Capital Management, argued that the Chinese yuan may not be undervalued as much as Western politicians think.

Although Chinese exports rose by 46 percent in the first two months of 2010, the rise is from a very low base -- with February 2009 being the epicenter of the U.S.-sparked sub-prime storm, he noted.

He also pointed out the fact that China's trade surplus dropped by 51 percent in the same period. That means China's gain in exports was outweighed by an import surge.

This hardly suggests the yuan, as (U.S. Treasury Secretary Tim) Geithner claims, is 'way too low,' Halligan said.

On Obama s call for China to adopt a more market-oriented exchange rate, Halligan said Washington is actually the biggest currency manipulator in the world.

The reality is that America s 'weak dollar' policy -- its long-standing practice of allowing its currency to depreciate in order to lower the value of its foreign debts -- amounts to the biggest currency manipulation in human history, Halligan said.