Former China Central Bank Adviser Yu Calls for Stronger Yuan
China should allow its currency to strengthen against the dollar to keep a lid on consumer prices, former Chinese central bank adviser Yu Yongding said.
“To allow the renminbi to appreciate would help fight inflation,” Yu said in an interview with Bloomberg Television’s Sara Eisen at the Bretton Woods conference in New Hampshire last weekend. Rising prices are “conducive for China to allow it to be more flexible” on its exchange rate, he said.
China is under pressure from the U.S. and other trading partners to allow its currency to appreciate faster to narrow a trade surplus that came to $183 billion last year. Lopsided global flows of goods and capital will be among the topics discussed by Group of 20 finance ministers meeting in Washington this week.
China should also stop building up dollar assets to avoid losing money as the U.S. currency weakens, said Yu, 62, who is now a member of the Beijing-based China Society of World Economics, a government-backed policy research group.
“The most important thing is to stop continuing to pile up foreign-exchange reserves,” said Yu. China should then consider shifting reserves into Special Drawing Rights, or SDRs, a basket of currencies used by the International Monetary Fund to determine reserve and loan levels.
China’s weak currency has stimulated exports while increasing the cost of imported goods and leading to the buildup of foreign-currency reserves. The nation accumulated $1.15 trillion in U.S. Treasuries as of January.
Consumer Prices
China’s consumer-price index probably climbed 5.2 percent in March, exceeding the government’s 2011 target of 4 percent for the third month, according to the median estimate in a Bloomberg News survey before the government report this week.
Inflation in China is “somewhat out of control and causing some serious danger of wage-price inflation,” billionaire investor George Soros said at the Bretton Woods conference. “It would be very advantageous to allow the currency to appreciate as a way of controlling inflation,” said Soros, chairman of Soros Fund Management LLC.
Yu said he was confident China could control inflation because it suffers from over-capacity. He blamed much of the inflation pressure on rising commodity prices caused by the Federal Reserve’s purchases of Treasuries, known as QE2 for the second round of quantitative easing.
Reserve Currency
The dollar’s status as a reserve currency is “the most important defect of the current international monetary system” because it “allows U.S. monetary authorities to carry out policies at the expense of other countries, for example QE2,” said Yu.
“The consequence is you drive up commodity prices, and you cause inflation in other countries,” he said.
Higher commodity prices contributed to China recording its first quarterly trade deficit since 2004 in the first three months of this year, underscoring the case for yuan gains to help contain prices. Inbound crude oil shipments in the first quarter rose 12 percent by volume and 39 percent by value to $43.7 billion, customs data showed this week.
“We want to decommission the U.S. dollar as the reserve currency gradually,” Yu said. “Basically it’s a political decision. We still need to think through all options.”
The yuan fell yesterday 0.04 percent to end at 6.5383 per dollar in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.5350 on April 8, the strongest level since the country unified official and market exchange rates at the end of 1993. In Hong Kong’s offshore market, the yuan slipped 0.05 percent to 6.5255 per dollar.
To contact the reporters on this story: Sara Eisen in New York at seisen2@bloomberg.net; Bob Willis in Washington at bwillis@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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