Rising Yuan a Risk to China Stability, Says Benjamin Wey: Weekend Interview

2011-06-03

As China plays an increasingly large role in world economics, its position in such entities as the International Monetary Fund (IMF) and global markets means its financial and political health are more important than ever to both its trade partners and financial institutions across the world.

China’s currency, the yuan, is at a record high against the dollar, and according to Benjamin Wey, president of New York Global Group and China expert, that can have serious consequences for the global economy.

In a recent interview, AdvisorOne spoke with Wey about the rising value of the yuan against the dollar and its ramifications.

How much has the yuan appreciated against the dollar?

Wey: So far this year, Chinese currency has appreciated 1.2% vs. the U.S. dollar. Since [U.S. monetary] policy loosened up last year, the yuan is up 5.4%. It’s a gradual upward trend.

Which factors are responsible for the appreciation of the yuan against the dollar?

Wey: The first is the depreciation of the U.S. dollar across the world. The dollar is less valuable due to the Fed’s loose policy and lower valuation. On the China front, its tremendous growth means that the country is faced with significant pressure from inflation, which this year is particularly severe. China can do one of several things: it can raise the value of its currency, and it can reverse or reduce some of the current trade imbalance with other countries.

How much are we talking about?

Wey: There is $30 billion a month in foreign currency sent to China through trade . . . That $30 billion could add to the liquidity of the Chinese economy by appreciating it further and making imports more expensive. That action will cause importers to buy more by paying in foreign currency, and that causes Chinese foreign product exports to drop due to their greater cost.

Chinahas been steadily raising the required reserve ratio (RRR) of its banks and increasing interest rates. How do you see that affecting the country’s inflation?

Wey: It’s a very effective measure: the central bank of China taking away the excessive liquidity of banks is part of collective efforts to beef up the local economy and to contain inflation. That’s its number one objective.

Its secondary objective is to maintain a balance between unemployment and inflation. It’s a balancing act all the time, because the more inflation, the more pay people get. By not having inflation, there’s too much constraint on the economy. Tightening policy, as they’re doing now, could reduce exports and kill jobs.

And you said that allowing the yuan to appreciate could also cause significant problems in China.

Wey: Any significant appreciation of the Chinese yuan will lead to massive unemployment, which will then threaten social and political stability in China. More than 50% of China’s GDP is exported oriented, and export volume is directly tied to the value of the Chinese yuan. The Chinese government adjusts

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