By BRADLEY S. KLAPPER | AP
GENEVA: A UN agency urged China on Tuesday to reject Western pressure to float its currency, defending Beijing as a leader in stimulating domestic demand and the global economy.
In a policy brief, the UN Conference on Trade and Development, or UNCTAD, starts with the iconoclastic argument that market forces have caused “currency chaos” in the world and that international control of exchange rates would be better.
Leaving currencies to irrational market forcers “will not help rebalance the global economy,” and a Chinese decision in this direction would risk an economic shock akin to the one Japan suffered in the 1990s, it said. That, in turn, could destabilize the entire world economy.
The argument counters the advice of many economists, who say that China keeps its currency artificially low against the dollar to promote exports. This line of thought blames the currency control for the large and worrisome imbalances in the economic relationship between the US and China: Americans import and borrow too much, while the Chinese export and save too much.
China recently surpassed Germany as the world's top exporter, and many lawmakers in the US and Europe want the Asian power to at least raise the peg of its tender, the yuan, to the dollar or face sanctions for being a currency manipulator.
The sentiment was reinforced Tuesday by a bipartisan group of US senators, who said they would outline a new proposal for stiff penalties on Chinese goods, if the government fails to realign its currency.
US Senator Charles Grassley, a Republican, told Fox Business Network on Tuesday that the United States should label China a currency manipulator and prepare a case for the World Trade Organization.
“I think we have waited too long,” Grassley said. “I would want the president to order our trade representative to start preparing a case for the WTO. And then I would have to start looking at some legislation, if China does not reply appropriately.” He urged Beijing to act as a responsible member of the international community.
“I am tired of China crying. We are a 400-year-old society; they are a 5,000-year-old society. They are very mature,” Grassley said. “I expect China to start acting like adults, instead of crying like children”. But China has repeatedly rejected US calls to ease currency controls, with Premier Wen Jiabao denying over the weekend that the yuan was undervalued. He said foreign pressure was unhelpful, and that Beijing planned to reform its exchange rate system, but that the currency would be kept at a “stable and balanced” level.
Critics say the yuan is undervalued by up to 40 percent, giving China's exporters an unfair price advantage.
UNCTAD said focusing on China's fixed rate ignores the larger problems that are hampering economic growth.
“Indeed, 'markets' were permitted to manipulate currencies in a way that made some sovereign governments and central banks look like penniless orphans,” said the agency, which has railed for years against US-style liberal economics.
It referred to the role of money speculation, price confusion and trade distortion in the global economic crisis, and said fluctuating exchange rates were a threat to international commerce and a likely alibi for rich-world nations ready to raise tariffs or enact other protectionist barriers to shield flagging industries from international competition.
Newfound confidence in the Brazilian real and the Hungarian forint could lead to overvaluation that hampers exports and saps growth in those countries, UNCTAD said.
And for China -- where private consumption is rising at “breakneck speed” and labor costs are surging -- dropping the yuan's peg to the dollar would mean an accelerated loss of competitiveness with dangerous consequences for the world. This would be unfair because China “has done more than any other emerging economy to stimulate domestic demand.” “Expecting that China will leave its exchange rate to the mercy of totally unreliable markets and risk a Japan-like appreciation shock ignores the importance of its domestic and external stability for the region and for the globe,” UNCTAD said.
The UN body's prescription: a world regulator of exchange rates to limit deviation and stabilize currencies.
UNCTAD acknowledged that such a system would entail “major political commitments and be fraught with technical difficulties,” an understatement considering that there is no global monetary overseer with the power to overrule national central banks and governments on key economic decisions such as interest rates, money supply and lending rules.
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