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Yuan Rise to Spur Domestic China Growth

Reuters
Thursday, 20 Sep 2007 | 12:55 AM ET

A more flexible yuan would not hold back China's growth or cause deflation but would help Beijing rebalance its economy towards domestic consumption, a top U.S. Treasury official said on Thursday.

David McCormick, the Treasury's new undersecretary for international affairs, said letting the currency's exchange rate rise would "remove a major cause of perceived unfairness" in U.S.-China bilateral relations.

"For the United States, what it will not do is cause a significant reduction in the U.S. trade deficit, nor will it provide a magic bullet for solving the problems of American industries facing overseas competition," McCormick said in a speech at Peking University.

The yuan has risen less than 10% since China scrapped a U.S. dollar peg in July 2005 and let the currency float within tightly managed bands. Washington says the yuan remains unfairly undervalued, giving Chinese exporters a competitive edge.

Answering questions after his speech, McCormick said Beijing and Washington were in strong agreement that China needed to pursue a goal of broad-based economic liberalization, including a market-driven currency.

"The Chinese leadership has said that very publicly. Where we often have differing views is in the pace of that change," he said.

He said in his speech that greater currency flexibility would make China's imports cheaper and give local firms an incentive to produce for their home market instead of for export.

"All of this will lead to growth that is more stable, more China-centered and more effective in raising the living standards of the Chinese people than China's current growth model now is."

Workers Will Benefit

His remarks come as U.S. lawmakers are working on legislation aimed at increasing pressure on Beijing to let the yuan rise.

U.S. Treasury Secretary Henry Paulson warned last week that punitive China trade legislation could start a trade war and make it more difficult to settle turbulent global financial markets.

McCormick said the United States was committed to maintaining an open trade and investment climate and must "strive to avoid the siren song of protectionism".

China's double-digit growth over the past five years has been driven by investment, as the country's high savings -- ploughed into low-yielding bank deposits -- have provided plenty of cheap capital for companies to build up production capacity for exports, McCormick said.

As a result, employers have strong incentives to substitute capital for labor, stunting job growth and leaving Chinese people with "a smaller and smaller and smaller share of the benefits of growth". "I know that there are many in China who have expressed concern that more rapid currency appreciation will hurt low-income workers in some sectors," he said.

"To the contrary, by encouraging employment growth in less capital intensive, domestic-oriented industries, exchange-rate appreciation will open up new opportunities for low-(skilled) and unskilled workers."

Above all, the next chapter in China's economic development would require a more efficient allocation of resources that is driven by more market-oriented prices, McCormick said in the question-and-answer session.

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