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Stronger Yuan Not Way to Tame Inflation, Mundell Says

Stronger Yuan Not Way to Tame Inflation
The yuan rose 0.22 percent to 6.59 per dollar on Jan. 14, reaching 6.5870 that day, the strongest level since 1993, according to the China Foreign Exchange Trade System in Shanghai. Photographer: Andrew Harrer/Bloomberg

Strengthening the yuan to tame inflation in China is “not necessarily a good recommendation,” said Robert Mundell, the Nobel-prize winning economist.

“One of the important forces of stability over the past decade has been the comparative stability of the yuan against the dollar, and that’s been a stabilizing force in all of Asia,” Mundell, who is a Columbia University professor, said in an interview with Bloomberg Television in Hong Kong today. “It’s always much better for China to keep the currency stable.”

Mundell’s remarks are in line with Chinese President Hu Jintao’s comment that responding to the country’s inflation can “hardly be the main factor in determining the exchange rate policy.” U.S. Treasury Secretary Timothy F. Geithner said last week that the yuan is still “substantially undervalued,” and that a faster climb in prices in China than in the U.S. is making Chinese goods less competitive.

Hu, who will meet President Barack Obama in Washington this week, said his government is fighting inflation with a package of policies, including interest-rate increases. China on Jan. 14 told banks to set aside more deposits as reserves for the fourth time in just over two months.

The Chinese president made the comments in responses to written questions from the Wall Street Journal and the Washington Post, the newspapers reported on their websites.

Importing Inflation

“The only strong argument for a change in the exchange rate is if the rest of the world” and “the dollar started to become unstable and China would have to import too much inflation,” Mundell, 78, said. China would then have to let the yuan appreciate, he said.

The yuan slid 0.07 percent to 6.5947 per dollar as of 1:44 p.m. local time, according to the China Foreign Exchange Trade System in Shanghai. Twelve-month non-deliverable forwards fell 0.3 percent to 6.4650 today, implying a 2 percent appreciation in the currency over a year, according to data compiled by Bloomberg.

China’s consumer-price index increased to a 28-month high of 5.1 percent in November, and the index may advance by 5 percent to 6 percent in the first half, estimated Qu Hongbin, economist at HSBC Holdings Plc.

Rising Property Prices

The country’s real estate prices rose for a 19th month in December. Prices in 70 cities increased 6.4 percent in December from a year earlier, China Information News, the statistics bureau’s newspaper, reported today. That was less than the 7 percent median estimate in a Bloomberg News survey of six economists. Prices gained 0.3 percent from November, the newspaper said.

Mundell also said the yuan will likely become an “important” international reserve currency in the long run when it becomes convertible.

On the European sovereign debt crisis, Mundell said Spain realizes it needs to get out of trouble, and it must reduce its budget deficits.

European policy makers’ decision to issue bonds to raise funds for bailouts will be a “big help,” and richer European countries will need to lend to troubled nations, the Columbia University economist said.

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 economist “played a significant role in the founding of the euro,” according to his page on Columbia University’s Web site.

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