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Bitter spat on currency rate harmful for US, China

10:40, April 06, 2010

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By Li Hong

Some say that it is around the dollar-RMB exchange rate that the economic might of the United States and China converge, and at times, collide. The extent the hassle is waging on between the two and engaging more cream intellectuals and officials speaks it.

In fact, Chinese people hold varied bastions. Some have hoped for a stronger RMB so as to empower their buying tour abroad, and, lately, lots of online blogs have molested the peg between RMB and the greenback in effect since mid 2008, complaining that made-in-China is sold to America at a discount, which has subsidized American families, enabled American largesse, and made easier the Fed's job of controlling inflation, all at China's expense.

Most scholars tend to agree that a stable rate would help provide jobs to vast migrant rural workers, although the jobs are often poorly paid. The government might be looking to it to provide social stability, or try to ensure a "grace time" when the country speeds up transformation to more advanced high-end industries, eliminating thousands of smoky and wasteful laggards in the country.

The American accusation that China intentionally seeks a huge trade surplus and builds up its reserve, in trading with the United States, is untrue. Nobel laureate Paul Krugman once wrote that Beijing has actually entered into a "dollar trap" – meaning it simply cannot attain a lot with the huge accumulation of the dollars.

All the more, Beijing is increasingly worried about the worthiness and safety of its giant dollar reserve. To fight credit squeeze in the aftermath of 2008 financial meltdown, the Federal Reserve has activated printing more paper dollars, making a run on its value.

What should be the reality of the RMB-dollar exchange rate, a figure that helps convenience daily lives and enrich companies via trade? Now, even in the United States, people hold diverse views. Some research institutes believe that RMB is undervalued by 20-40 percent, some believe RMB is undervalued by about 10 percent, while others say RMB is overvalued against the dollar. The general view is that the market is the viable venue to decide its equation.

A prominent Chinese economist, sitting at the newly shuffled central bank's monetary policy committee, has challenged the United States to "buy RMB" notes on the open market, bring down the value of US dollar, and therefore enable more American exports to China. The economist, Peking University economics professor Zhou Qiren, recommends Beijing hold steady its currency rate with the greenback, despite the increasingly verbal pressure from Washington demanding RMB rate be artificially revised higher.

"Whoever advocating an appreciating RMB, including some US congressional members and the economist Krugman, ought to stop yelling at China, and instead purchase RMB notes with their dollars. Then, won't RMB rise in value?" Zhou told the China Business News in an interview published on April 2. He even advocated that China's banks do a better service to make easier Americans buy RMB on the market.

People would want to know Mr. Krugman's reactions to the outburst. That said, Beijing has been for years buying the dollar notes on the open market in order to ensure a de facto RMB peg to the greenback.

Professor Krugman penned on The New York Times on March 14 a column called "Taking on China", in which Mr. Krugman recommended that Washington take a "policy hardball" on China, and if Beijing refutes to cave in, Chinese goods would be greeted at the customs with a 25 percent "surcharge" – decimating punitive tariffs.

This antes up the heat on Beijing and foretells a looming trade war, which is a perilous scenario for the two powers. China has enormous stakes in having access to American market, just as the United States also has a huge stake in having access to China's. Confrontation between the two is always a very bad idea, which the two countries' politicians and policy advisers must do their best to avoid.

President Hu Jintao's upcoming visit to Washington and the Obama administration's postponing its report on America's trade partners' performances will prove to be of wise political judgment. My take: the Sino-US Strategic and Economic Dialogue in May in Beijing should provide a good chance to air views and conduct candid talks on their rate.

As I predicted in a previous column, it still is fairly possible that RMB will rise by around 3 percent by the year end.

The articles in this column represent the author's views only. They do not represent opinions of People's Daily or People's Daily Online.

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About this column

Li Hong has been a reporter and column writer, mainly on China's economy and politics.

He was graduated from Beijing Foreign Studies University, and once studied in University of Hawaii and the Poynter Institute in Florida.

Columnists

John 
Milligan-Whyte 
and
Dai MinJohn
Milligan-Whyte
and
Dai Min

John Milligan-Whyte and Dai Min, the executive producers and co-hosts of the Collaboration of Civilizations television series adapted by the eight books they wrote in the America-China Partnership Book Series published in English and Mandarin in 2009-2010 that created the "New School of America-China Relations." They founded the America-China Partnership Foundation and Forum in 2008 and the Center for American-China Partnership in 2005, which was recognized in 2009 as "the first American think tank to combine and integrate American and Chinese perspectives providing a complete answer for America and China's success in the 21st century."

Li HongmeiLi Hongmei

Li Hongmei, editor and columnist of PD Online.

http://english.people.com.cn/90002/96743/6941478.pdf