A drastic revaluation of the yuan may suit the interests of international speculators but could trigger a financial crisis in China, a senior economist has warned.
Lin Yifu, director of the China Centre for Economic Research (CCER) at Peking University, made the remarks at a forum held by the institute on Sunday and rejected the claim that the renminbi is grossly undervalued.

If the Chinese currency were seriously undervalued, the ratio of the trade surplus to the overall trade volume should be very high, which was not the case, Lin explained in an article published on the CCER website.

In 2005, the ratio was 7.2 percent. During the Asian financial crisis in 1997 and 1998, when there was strong pressure for the yuan to be depreciated, the figures were 12.4 and 13.4 percent.

From another perspective, if the yuan were seriously undervalued, the ratio of the trade surplus to the gross domestic product (GDP) should also be much higher than that in other Asian countries.

But China's ratio is much lower than in Singapore, South Korea, Malaysia, Thailand or Japan.

Lin said that international speculators hope the Japanese and US governments pressure China to revalue the yuan so that they could profit from speculative deals.

A large-margin revaluation would not reduce China's trade surplus or foreign exchange reserves, as the value of the renminbi is not the reason, Lin said. Instead, it will lead to increased imports and decreased exports, which will exacerbate China's overproduction.

It may, in turn, lead to deflation, lower corporate profits, increased bad loans and "could even trigger a financial crisis," he said.

He suggested that China stick to its principle that the yuan's appreciation be independent, flexible and affordable and make it clear that the pace of the revaluation would remain at about 3 percent a year.

The yuan is expected to appreciate by 5-6 percent this year.

Replying to [Business in China]:
well my friend you know the USA
they would love that in China / I just hope the china gov tells the US to get x@#y6#@z

Replying to [Business in China]:

Appreciating the RMB drastically "could spark crisis" not just nationally in China, but the whole world as well. It is always best to evaluate the economy first and make careful decision. I understand China's position very well.

The concern coming from the US, is of course, demanding the appreciation of RMB. But the main concern they have is the fixed RMB. It is a better idea to let the global currency market to decide the valuation of RMB. Letting the central Bank to decide the value of RMB can be a bad idea because sometimes it may lead to dire consequences. That is why US has the floating currency system.

Replying to [Business in China]:Rising yuan will effect global economy.On one hand , Chinese goods will becom costlier to export, on the other hand, it will make other country exports more competitive to chinese prices.
Sixer

Replying to [Business in China]:
Theoretically the Chinese are supposed to float the Yuan according to the WTO agreements. I assume the Chinese government will do this more gradually than not to try and allow for a "soft" landing and allow the yuan to move incrimentally rather than just go "cold turkey" as a freely traded currency.

Gonna be interesting to watch over the next couple of years.

It also brings to the forefront what (if any) political changes will occur in China in the next decade. Again the variations can be extreme but hopefully things will lay out fairly smoothly rather than any type of "radical" changes occuring.

If the yuan does "drastically rise" (call it 20% in 2007) then China will face some seriously large issues and I would not want to be the one trying to keep thingson an even keel. However I don't see that happening. The central bank will support the yuan and they will keep going the way they have been... nice steady progress.... The advantages of a culture that thinks long term!

**********************************************************************
Update. Just saw the stats for China's exports for the last month... up 67%... With numbers like that my thought that China will be able to "ease" the yuan into floating don't stand up. If that kind of growth continues then the other major countries (call it the G7 or 8 or 9 or whatever we are now) are going to put pressure on China to have the yuan fully floated by the end of calendar 2007!

So allowing that China won't want to do that, they will hold NKorea as a stick against the others and they will throw that around for a while and then US domestic politics will kick in in Feb 08 and no-one will want to touch it ... then Nov 08 the US elections. jan 09 before a new Pres in the US....... so the Yuan will float fully mid 09..... UNLESS Angie Merk throws her weight around and then i am back to guessing full float by 3rd 4th month of 08.

Any takers?

(for those who understand the term... PUNT!)

Replying to [Foow]:

The world has more confidence in the Yuan than mainland Chinese themselves.

I've been advising Chinese for a long time to pull those US dollars out from under their beds and switch back to local currency ... they won't believe me. You would be astonished at just how much US currency is held in mainland homes in cash.

Overall, I don't think China will hit crisis point ... either in currency revaluation or in politics ... I've watched their policy makers at work for some 25 years now ... they are world best at both ... far too smart to let things get out of hand.

Chinese exports are still increasing but imports have surged too ... last month's balance of payments was actually less than previous.

The key current Chinese policy of getting domestic consumption to increase seems to be cutting in ... as shown in the decreasing balance of payments ... that's good news for particularly USA and EU exports and great for medium term global health.

If the Chinese Gov can keep succeeding in getting mainlanders to increase their personal spending, the current good world business climate will have it's longest best ride ever.

Replying to [Aussie]:
Aus,
I agree that the Chinese gov is very good at taking the long term view of things.

My concerns re China over the next 5-10 years is how much that influx of money might "change" the country to a point where the gov has to give more ground on social issues. And also on how other countries try to "cope" with the awakening giant that China is. Do other countries start pusghing harder on China on here perceived 'flaws" and trade "unfairness". (eg the copyright issue which is ongoing).

The discussion could be endless if we try to anticipate every move that China makes and the countermoves other coutries may take etc etc. then you bring some of those other factors in and you end up with what I suggested.. a punt.

Replying to [Business in China]:

Please read Nobel prize winnerRobern Mundell thoughts on Chinse yuan covertability in Far Eastern Economic Review:

http://www.feer.com/articles1/2007/0706/free/p016.html

It is new and refreshing.

Replying to [Ganapathie]:

Indeed, that article is refreshing and lends new perspectives to this issue.  Prof Mundell, the "playful old child" knows what he's talking about.

macs2005

Replying to:
update question,

Will China start working ahrder against those who are producing not just illegal but DANGEROUS products.

Me thinks they should start......... but not all is coming from China... just passing thru it..... When you start allowing thru products that KILL citizens of another country, that country tends to get annoyed. Great that the small number doing this could seriously damage China as a whole.