WWD.com/business-news/government-trade/un-report-urges-major-revaluation-of-chinas-currency-1739237/
government-trade
government-trade

UN Report Urges Major Revaluation of China’s Currency

China should consider revaluing its currency, the yuan, "in one big step" rather than in a series of incremental appreciations.

INTERLAKEN, Switzerland — China should consider revaluing its currency, the yuan, “in one big step” rather than in a series of incremental appreciations, a report by a United Nations agency said Thursday.

This story first appeared in the September 5, 2008 issue of WWD.  Subscribe Today.

U.N. economists said such action by Chinese authorities would help contain growing speculation pressures on the currency.

“Continuing short appreciations are inviting speculators to go into China,” said Heiner Flassbeck, chief economist at the U.N. Conference on Trade and Development and lead author of the report, adding that a one-step appreciation could help limit the risk.

The agency’s “Trade and Development Report, 2008,” said the continued inflow of short-term capital “attracted by government-controlled appreciation” and significant increases in foreign exchange reserves are factors that support a revaluation of the yuan.

UNCTAD chief Supachai Panitchpakdi said an appreciation of the yuan may also contribute to “the global adjustment of trade balances” by slowing China’s export growth.

With the U.S. trade deficit with China reaching $256.7 billion last year, Beijing has been under pressure from Congress and the Bush administration, which believe the yuan is still undervalued despite some steps to bring it in line. Critics in the U.S. argue that the undervalued currency gives China an unfair advantage in producing cheaper goods.

The European Union, which has become the top destination for Chinese manufactured exports, has also started to lean on Beijing to take more forceful steps to revalue the currency. Chinese authorities appear to be resisting these demands as they believe the yuan has appreciated enough and, given the global downturn, are reluctant to go for a big revaluation.

“They have been under immense pressure to do it and they have resisted it,” Ian Morley, director of London-based Hobart Capital Markets, said at an international finance conference here. “It’s hard to see that based on their export-driven focus, they would want to put themselves into a less competitive situation in such a dramatic way.”

The U.N. projects 2.9 percent growth in world output in 2008, compared with 3.8 percent last year. Growth in rich developed countries is forecast at about 1.5 percent, versus 2.5 percent the previous year.

The U.S. economy is projected to grow 1.4 percent, down from 2.2 percent last year. However, growth in developing countries could exceed 6 percent “as a result of the stable dynamics of domestic demand in a number of large economies,” the report said. China’s economy is still expected to expand by 10 percent, down from 11.4 percent in 2007, and India by around 7.6 percent, down from 9.7 percent achieved in 2007.