09/23/2010, 00.00
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Wen warns, touching the yuan would cause unrest in China

Unemployment and social instability would follow a revaluation of the Chinese currency, according to the Chinese premier. Despite differences of opinion, Washington and Beijing will nevertheless rise or fall together because of the degree of integration of their economies.

New York (AsiaNews) – “There is no basis for a drastic appreciation of the renminbi (yuan)," Chinese Prime Minister Wen Jiabao said. “The main reason for the US trade deficit with China is not the renminbi exchange rate,” he added. In fact, “If the renminbi appreciates [. . .] according to the requests of the US government, we do not know how many Chinese companies will go bankrupt and how many Chinese workers will be laid off and how many rural workers will go back to their homes,” the premier said in New York in a speech meant to respond to pressures from the United States, which has accused China of keeping its currency artificially low.

Speaking before the US-China Business Council, the Chinese leader reiterated the point that there is no basis to appreciate drastically the Chinese currency. If it gained 20 to 40 per cent, as the US had demanded, it would cause “major turbulence" in society. Indeed, as many analysts have already pointed out, the real reason not to touch the yuan is China’s domestic stability. A higher yuan would lead to higher prices if wages were kept constant.

US President Barack Obama recently said that he would continue to put pressure on China to appreciate its currency, which is tightly controlled by the Chinese government.

US Treasury Secretary Timothy Geithner also upped the ante, saying that China continued to “massively intervene” on money markets to weaken the yuan, and that it was “high time” it changed its “economic model”.

Conversely, Wen said, “The main cause of the U.S. trade deficit is not the exchange rate of the Chinese currency, but the structure of investment and savings”.

In New York for the United Nations General Assembly, the prime minister is scheduled to meet President Obama in a close-door meeting that is expected to be dominated by the currency issue.

Since 19 June, the yuan has gained 2 per cent against the US dollar after the People’s Bank of China said it would allow a more flexible exchange rate after keeping it at about 6.83 for almost two years. Two days ago, it closed around 6.7079 in Shanghai, the highest it has ever been since 1993.

For the Americans, the exchange rate skews trading patterns in favour of China. Even so, US sales in goods were up by 26.4 per cent in the first seven months over last year, still 12.1 per cent below what it was in 2008. At the same time, Chinese trade is up 40 per cent. Given the huge numbers involved, any trade war between the two countries would be unthinkable.

In reality, the Washington wants to balance the trade relationship with Beijing. In the first seven months of 2010, the United States imports reached US$ 193 billion against only US$ 48.3 billion in exports.

Although exports rose 36 per cent over last year, they are still too low. If the yuan appreciated, US products would thus become more competitive in the Chinese markets.

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See also
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Obama on the attack on the yuan, which makes gains
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