Top Biz News

Economist warns China of risks from further yuan appreciation

(Xinhua)
Updated: 2007-04-23 15:04

Renowned U.S. economist, John Rutledge, who helped frame the fiscal policies of two former U.S.presidents, warned that an abrupt rise in China's currency could lead to another Asian financial crisis.

The founder of Rutledge Capital told Xinhua that if the yuan rises too fast and too high it would discourageforeign direct investmentin China while encouraging currency manipulation by market speculators.

Related readings: Central bank rejects IMF yuan advice Yuan likely to rise 4% this year Yuan hits new high after breaking 7.73 mark

"Currency change is more difficult forFDIinvestors and more exciting for speculators," said Rutledge.

The Chinese currency has appreciated by more than five percent since July 2005 when the country allowed the yuan to float against the U.S. dollar within a daily band of 0.3 percent.

Analysts are expecting the currency to rise another four percent by the end of this year.

Rutledge says if the yuan rose 20 to 30 percent, as some U.S. politicians are demanding, it would jeopardize the Chinese economy causing a recession and deflation.

Similar advice to allow an abrupt appreciation of a currency led to the Asian financial crisis in 1997, and came very close to destroying the Japanese economy, said Rutledge, who was an advisor for both the Reagan and the senior Bush administrations on economy and tax policies.

The U.S. economist says that investors want foremost to avoid risks associated with large fluctuations in currency and inflation. They calculate returns on their investment after evaluating risks to benefits such as lower labor cost. A rising yuan would drive up labor costs for foreign investors and would not result in higher wages for workers.

Earlier reports said that currency speculators had pumped 200 billion U.S. dollars into China by the end of last year, with another 70 billion U.S. dollars flowing into the economy in the first three months of this year.

There is no way to accurately track the flow of this type of investment and many economists disagree that the amount of speculative cash is so high.

Rutledge says instead of further appreciating its currency, China should make the yuan convertible to the U.S. dollar.

He says the proposed test of foreign exchange reform inTianjin, which explores ways of making the yuan convertible, is "the best thing in China's monetary policy." He says if the yuan were more easily converted into foreign currencies it would allow Chinese companies to expand overseas, facilitate the purchase of foreign technology, provide management experience and capital that China needs. If this were to happen it would shrink forex reserves and reduce speculative money coming into the country, says Rutledge.

Rutledge acknowledged that China's trade surplus with U.S. was the main reason politicians are calling for further appreciation of the yuan. He said the U.S fears that cheap goods from China will cause more U.S. workers to lose their jobs.