Robert Mundell, the Nobel Prize- winning economist, signaled that China’s pledge to return to a more flexible exchange-rate policy may erode stability in the global and Chinese economies.
Keeping the yuan pegged to the dollar has been “a great source of stability” for China and the world, the Columbia University professor told reporters in Hong Kong today. While U.S. President Barack Obama welcomed the move, “he is not an economist,” Mundell said.
The yuan climbed the most in 18 months against the dollar today after the central bank said June 19 it will increase the currency’s “flexibility,” signaling an end to the crisis policy of a peg. The announcement was ahead of a Group of 20 summit this week where leaders will discuss how to sustain the global recovery and prevent a repeat of the financial crisis.
Mundell, credited as the intellectual “father” of the euro, has previously called for the European currency to be fixed against the dollar, saying exchange-rate swings were a cause of the global financial crisis.
The yuan climbed 0.14 percent to 6.8165 per dollar at 10:55 a.m. in Hong Kong, from 6.8262 on June 18, the biggest gain since Dec. 31, 2008.
The central bank’s announcement followed pressure from trading partners including the U.S., where lawmakers threaten legislation that could penalize Chinese imports. An under-valued yuan, or renminbi, gives the nation an unfair advantage in trade, they argue.
“It’s wrong for the U.S. to force China to destabilize the renminbi, I myself don’t think it’s a good idea,” Mundell said. He called the Chinese move “political.”
The yuan has traded at about 6.83 per dollar since July 2008, a policy that the central bank indicated is no longer necessary after the Chinese economy cemented its recovery.
Mundell said the yuan-dollar peg gave Asian exporting nations more confidence in their trade positions by tying together two of their biggest customers. It also served as an “anchor” for the exporting countries’ monetary policies, he said.
China could tackle its balance-of-payments surplus and build-up in foreign-exchange reserves while maintaining a fixed exchange rate, the economist added, saying that the tools could include boosting wages and consumer spending and easing the way for more imports.
Inflation, Asset Bubbles
In a question-and-answer document published yesterday, the People’s Bank of China said that a floating exchange rate will help the nation to restructure its economy, curb inflation and asset bubbles, and reduce trade imbalances.
China is “accelerating efforts to adjust its economic structure and growth model, and the global financial crisis has made this task even more important and pressing,” the central bank said. “The reform of the exchange-rate mechanism will help promote economic restructuring and improve the quality and efficiency of growth.”
Mundell, who won a Nobel Prize in economics in 1999, spoke to reporters at a conference center where he was giving a speech. The economist “played a significant role in the founding of the euro,” according to his page on Columbia University’s Web site.