World Bank says stronger yuan in China s interests

October 19, 2010
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, BEIJING, Oct 19 – A stronger yuan exchange rate is in China\’s interests and would help the country rein in inflation and boost domestic consumption, the World Bank said Tuesday.

"I think real appreciation of the renminbi is something that is probably in China\’s interests for many reasons," the bank\’s lead economist for China, Ardo Hansson, said at the launch of a report on developing East Asian economies.

"It can at the margin help in dealing with inflation by lowering the price of imported goods … and can be part of the arsenal in dealing with capital inflows," he told reporters in Beijing.

Inflation has been picking up in recent months, rising at the fastest pace in nearly two years in August, as food prices rose due to severe floods and unusually hot weather that destroyed crops.

A stronger currency would also boost domestic consumption by making imported goods cheaper, helping policymakers achieve their oft-stated goal of making domestic demand a bigger driver of economic growth, Hansson added.

The World Bank report comes as China, the world\’s biggest exporter and second-largest economy, faces growing pressure from major trading partners to let its currency appreciate at a faster rate against the dollar.

The yuan has increased "more modestly" than other units in the region, the World Bank said — far weaker language than that used by critics in the United States and Europe who claim the currency is grossly undervalued.

China has rejected calls for a rapid rise in its currency, arguing such a move would destroy domestic businesses, trigger massive layoffs and disrupt the global economic recovery.

Since pledging limited currency reform in June, China has let the yuan appreciate less than three percent against the dollar — angering critics who say the currency is undervalued by as much as 40 percent.

China\’s stubborn defence of the yuan comes amid growing fears of a "currency war", in which nations, seeking to export their way out of the downturn, are trying to cap or lower their currencies to make their exports more competitive.

While the dollar, the global reserve currency, has fallen, Japan, Switzerland and other countries have sold their local units to keep them from strengthening, while Brazil had also intervened, the World Bank pointed out.

The bank said that "developed and developing countries worldwide are bent on avoiding stronger exchange rates, as concerns about weak foreign demand — and a limited scope for exports to boost growth — intensify."

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