September 7, 2010 / 4:44 AM / 7 years ago

Strong yuan would hurt China: economists

BEIJING (Reuters) - China must resist external pressure for yuan appreciation because a stronger exchange rate would take a big bite out of economic growth, according to a pair of senior government researchers.

Li Jianwei and Yu Bin, economists in a think tank under the State Council, or cabinet, said that a substantial rise in the yuan could cut growth next year to 8.4 percent from their baseline forecast of 10.2 percent.

They did not spell out what they meant by “substantial.”

Writing in the latest issue of the Chinese-language Reform magazine, Li and Yu also said that Beijing should enhance the yuan’s flexibility if the euro depreciates -- in effect, suggesting that the yuan should be allowed to fall against the dollar in those circumstances.

While their comments do not necessarily reflect official thinking, they do underscore how many high-level economists in the government think that a strong currency could deal a serious blow to China when the global economy is still on shaky ground.

“If imports by the United States, Europe and Japan slow sharply and the renminbi appreciates strongly at the same time, the concentration of these negative factors will lead to a steep correction for our economy,” Li and Yu wrote.

China lifted the yuan, also known as the renminbi, from a nearly two-year de facto peg to the dollar on June 19 and vowed to steer its currency regime toward greater flexibility.

But nearly three months on, the promises appear to have amounted to little. The yuan has gained just 0.6 percent against the dollar since the depegging, even if the pace of appreciation has increased a touch in recent days. <CNY/>

“If there is large-scale euro depreciation against the dollar, we should progressively increase the flexibility of the renminbi’s exchange rate and maintain the renminbi’s nominal effective exchange rate at a reasonable, balanced level,” Li and Yu wrote.

“We must resist large-scale yuan appreciation brought about by external pressure and prevent a big drop in export growth,” they added.

Hu Xiaolian, a Chinese central bank vice governor, has said that more focus should be placed on the yuan’s nominal effective exchange rate -- its value against a basket of currencies, not just the dollar.

On that basis, the yuan has weakened over the past three months, because it has been closely tied to a broadly weakening dollar.

China’s reluctance to allow more yuan appreciation could set the stage for a political collision with the United States, where many lawmakers complain that Beijing keeps its currency undervalued to give its exporters an unfair advantage.

Larry Summers, who is President Barack Obama’s top economic adviser, is in Beijing for talks with Chinese officials.

Vice Premier Wang Qishan told him that China wants to narrow differences with the United States on a range of issues, state media reported on Tuesday.

Reporting by Simon Rabinovitch; Editing by Ken Wills

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