Appreciating Yuan Could be "Disaster" for World Economy

For the last few decades economists have pinpointed large current account imbalances as one of the main problems that led to the global financial crisis. Some academics accuse an undervalued Chinese yuan of contributing towards such discrepancies. The United States, in particular, blames the yuan for its own ballooning unemployment figures.

However the authors of a new study argue that placing all the blame on China is wrong, narrow minded, and could risk further damage to the world economy.

CRI's Dominic Swire brings us this report.

For a long time the United States and other countries have been calling for China to increase the value of its currency. They argue that a artificially low yuan undercuts domestic products, contributing a large current account deficit and resulting in high unemployment.

However, the authors of a report released by German non-profit organization Bertelsmann Foundation argues that this way of thinking is dead wrong.

Political economist Stephan Collignon is one of the four authors behind the new study.

"From my point of view the most important message is pushing China into a rapid revaluation or appreciation or, even worse, into liberating foreign exchange markets and letting the RMB float would be a disaster for china and a disaster for the world economy."

The report argues that a rapid revaluation of the yuan could lead to the currency overheating and curtail the rapid economic growth in China that the world has grown used to over the past few decades. Ultimately this would hurt economies that have been profiting from China's growth, such as Europe, Japan, and the United States.

Professor Stephen Collignon argues that Beijing's current policy of a weak currency is the correct one for the country right now.

"China's development model is very much in line with all develop models we have seen in Europe in the 1950s and 60s, in Japan in the 60s, in South Korea and East Asia. This model is based on having a competitive and fixed exchange rate linked to the dollar which allows China to integrate into the world market and be competitive where the relatively undervalued currency is helping China to overcome the handicap that it has from the catch up development that it needs to do."

The timing of this report is significant, released just days before the G20 summit in Seoul, where the issue of the currency valuation is undoubtedly going to be a hot topic. Whether it will have a significant influence over policy makers in countries arguing for a revaluation of the yuan, however, remains to be seen.

For CRI, I'm Dominic Swire