September 19, 2010 / 5:34 AM / 8 years ago

China won't repeat Japan's FX error: central bank adviser

BEIJING (Reuters) - China will not repeat Japan’s mistake of the 1980s and let its exchange rate surge in response to foreign pressure, Li Daokui, an adviser to the People’s Bank of China, said on Sunday.

Li, an economics professor at Tsinghua University in Beijing, said arm-twisting from abroad over the yuan was only beginning.

“External pressure for China to appreciate the yuan is going to increase in the next several years,” Li told a forum.

But he said the exchange rate was only one of many tools China could deploy to adjust the structure of its economy and reduce its external payments surplus. For instance, as a large country, China’s scope to boost domestic demand was vast.

“So it is no longer necessary for China to achieve trade balance only by appreciating the yuan. We can also improve our trade structure by increasing imports, which is what we are doing now,” Li told Reuters on the sidelines of the conference.

As a percentage of GDP, China’s current account surplus this year is likely to be less than half the 11 percent peak it reached in 2007.

Li, a member of the central bank’s monetary policy committee, said the economic circumstances in China today were different from those in Japan in 1985.

The yen rose sharply after Japan and other leading economies sealed the Plaza Accord in 1985 to bring about an orderly decline in the dollar to reduce a bulging U.S. current account deficit.

As money poured into Japan to chase the yen higher, loose monetary policy inflated an asset price bubble that burst at the start of the 1990s, ushering in two decades of economic stagnation and a battle against deflation that is still not won.

Policymakers and researchers in China are acutely aware of Japan’s experience.

“China will not go down the path Japan took and give in to foreign pressure on the issue of the yuan’s exchange rate,” Li said.

He urged U.S. lawmakers, who are considering legislation to punish China for what they see as an unfairly cheap yuan, to stop pointing figures at Beijing over the exchange rate.

“The U.S. should pay much more attention to its own problems. What has the U.S. done while we have been reducing our trade surplus?” Li said.

Reporting by Aileen Wang and Alan Wheatley; Editing by Alex Richardson

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