Contradicting recent strong statements from Chinese officials, the Chinese Academy of Social Sciences (CASS), a government-connected think-tank, said Wednesday that now would be a good time for China’s currency, the yuan, to be appreciated 10 percent against the US dollar in a single move and then be allowed to fluctuate 3 percent annually. Economists questioned the feasibility of the proposal.
Zhang Bin, a researcher at the Institute of World Economics and Politics under the CASS, made the proposal in a report.
“It doesn’t mean that a 10 percent appreciation is the just-right level,” Zhang said. “It only means that China’s economy can handle the impact of a 10 percent appreciation of its currency.”
Zhang said now is the right time to make such a move because the hot money flowing into China on expectations of the yuan’s appreciation adds to the risk of inflation caused by the increased money supply following loose monetary policies introduced to combat the global financial crisis.
The suggestion contradicts repeated statements by the central government that the yuan would not be allowed to appreciate against the US dollar.
“We will never compromise with whomever gives us any form of pressure for currency appreciation,” Premier Wen Jiabao said in response to questions on foreign trade protectionism and disputes with China in an interview with the Xinhua news agency December 27.
The one-off appreciation against the dollar would reduce the trade surplus and correct economic structural imbalances, head off rumors of the yuan’s appreciation against the dollar, and reduce the impact of speculative capital, Zhang wrote in his report.
The report said that allowing the yuan to appreciate would also be a proactive move in maintaining good trade relations. Since last year, China has seen increasing anti-dumping cases against its exports to the US, the EU and other countries and regions that have accused China of refusing to let the yuan appreciate.
Lu Ting, an economist with Bank of America-Merrill Lynch China, said that China’s exporters couldn’t stand a 10 percent appreciation of the yuan. Many have a profit margin of less than 5 percent and would suffer losses if they had to maintain their current prices, which are often denominated in other currencies, usually the US dollar, he said. Exports contribute about 17 percent of China’s GDP, and the total volume accounts for about 30 percent of the GDP, and a further dip in exports could also cause unemployment, Lu said.
Zhang’s suggestion is unwise, Lu Zhengwei, chief economist of the Industrial Bank, said. The US has pushed for a 20-40 percent appreciation of the yuan, and with the dollar getting stronger as the economy recovers, the yuan might face further pressure, he said.