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Economists Call for China to Allow Yuan to Rise - 2004-05-26

Top international economists are calling for China to allow its currency to rise against the dollar. Participants at a conference at the (non-government) Institute for International Economics say such action would be beneficial to both China and the world economy.

The head of the Institute, Fred Bergsten, believes China is making a mistake in maintaining its current fixed peg to the dollar. This has meant that while the euro and the Japanese yen has risen against the dollar over the past year, the Chinese yuan has fallen against the yen -- bad news for Japan, which sends 12 percent of its goods to China.

John Williamson, an economist at the Institute, warns that the flow of foreign currency in China could result in inflation and a crisis in China's banking sector. "[Perhaps] China is heading for a financial crisis on its present road," he says. "And the way to stop that is to prevent the inflow [of dollars] in its tracks by appreciating the currency."

Many conference participants agree that most of the dollar decline has been absorbed by the euro and that currency's rise has slowed Europe's recovery from three years of economic stagnation.

Takatoshi Ito of the University of Tokyo says that if China permitted its currency to rise against the dollar, Japan would follow suit and be more likely to permit a further rise of the yen. "So the best of both worlds is that the yen appreciates against the U.S. dollar. I don't know - you want 20 percent -- fine, I'll give you 20 percent. But the other Asian currencies will appreciate with the yen," he says. "In that sense the real effective exchange rate of the yen appreciation will be 10 percent."

The Institute also addressed the rising U.S. trade deficit saying the the dollar needs to fall considerably further in order to bring down the potentially destabilizing imbalance. The dollar was down about ten percent 2003.