The yuan appreciation process is stable, but China should learn from Japan's experience and prevent its currency from rising too fast, Nobel laureate Robert Mundell said yesterday.

 

The yuan has appreciated by about 10 percent in the past two years, Mundell said during the 11th Business Week CEO Forum yesterday. "Five percent a year is the average rate."

 

China de-pegged the yuan from the US dollar in July 2005 and allowed the yuan's daily floating band against the US dollar to be widened gradually from 0.3 to 0.5 percent.

 

But Western economies have insisted the pace is too slow to substantially cut the trade deficit with China and demanded a much faster revaluation of the yuan.

 

Some EU officials have suggested the European Union join forces with the United States to pressure China to toe the line.

 

"But I don't think the US will do that," Mundell said in an exclusive interview with China Daily.

 

Economists have said the rising value of the yuan will not help the US trade balance in the long term, citing Japan's experience.

 

Although the Japanese government bowed to US pressure in the 1970s and 1980s to freely float the yen and allowed it to rise continually against the US dollar, the US trade deficit with Japan has not changed much.

 

Mundell said if China continues its current renminbi policy, the Chinese economy will not suffer much damage.

 

"The yuan appreciation is in the same direction with that of the yen, but nothing like it in terms of magnitude," he said.

 

If China is to continue such a rate of appreciation, it probably would not do a great deal of harm, he said.

 

The Western world is trying to pressure China to appreciate the yuan more rapidly, the Columbia University economics professor noted, but he warned that China should draw from Japan's experience and resist the pressure.

 

Japan's policy to freely float the yen has done "terrible" damage to the country's economy. "That's something to be worried about and avoided."

 

Although it has not happened in China, Mundell said, "it's a good lesson to keep in mind that you (China) don't let it go up too rapidly in the future."

 

Economists have forecast that the yuan would appreciate by about 5 percent this year. It was 7.46 against the US dollar yesterday, according to the central bank's central parity rate, appreciating by about 4.5 percent so far this year.

 

The International Monetary Fund has decided to adopt a new framework for the organization's bilateral surveillance, or the way in which it monitors and assesses its member countries' economies.

 

It is updating a 1977 decision on surveillance of exchange rate policies and has added a new rule that members should avoid exchange rate policies that result in external instability.

 

The ruling has been widely interpreted as a move to increase pressure on China to allow the yuan to be revalued faster. The World Bank and the IMF last month also called on China to reform its exchange rate regime.

 

But Mundell said their decision might not be right. "There are 3,000 economists with PhDs in the IMF, but it doesn't mean they have the right ideas."

 

The economics professor also suggested that China should take advantage of IT tools like distance learning to push education so that more people benefit from knowledge.

 

The 17th Party Congress, which was convened last month, made the right move in taking a fresh look at non-economic issues such as the environment and social harmony, he said, adding education would help narrow regional inequality.

 

(China Daily November 7, 2007)