WB Vice-President: Yuan Exchange Rate not Key Reason for Trade Imbalance

飞雪寒冰

The Chinese currency's exchange rate is not the key reason behind the imbalance in China's foreign trade, and adjustments to the currency will not help achieve balance, World Bank vice president and chief economist Lin Yifu said.

In an exclusive interview with Caijing on sidelines of the annual meeting of the International Monetary Fund and World Bank, which ended in Istanbul on Oct 7, Lin said the yuan is expected to appreciate, but only over the long term – and not as rapidly as some of China's trading partners would like.  

Lin made the comments in response to the IMF's world economic outlook and financial stability reports, which asked Asian countries to adjust their foreign exchange rates to ensure a global rebalancing of trade. The IMF's managing director Dominique Strauss-Kahn also said in April that the yuan is significantly undervalued.  

"A rise in the yuan's value will lead to declines in exports of major industries, a rise in domestic unemployment and overcapacity. Increasing unemployment will reduce demand while overcapacity will cause deflation, forcing prices back to real levels. In other words, a rise in the yuan will not solve the problem of imbalances," Lin said.

飞雪寒冰

The yuan's appreciation against the dollar in 2006 and 2007 resulted in a narrower U.S. trade surplus with Europe and a wider trade deficit with China, Lin noted.  

Separately, Lin said China should guard against asset bubbles, as every financial crisis in the history of mature economies had its start from the bursting of an asset bubbles.  

China should exert more effort in monitoring and guiding fund flows and project approvals to reduce the bubble risk while implementing a proactive fiscal policy, Lin said.

飞雪寒冰

The worldwide recovery in economic growth, industrial output and trade volume starting in the second quarter was mainly due to proactive fiscal policies by major economies and restocking by enterprises, according to Lin.  

But it is necessary to maintain a proactive fiscal policy globally amid still-weak demand, Lin said.

Lin added that China should transfer some of its overcapacity and labor-intensive industries to Africa, instead of simply seeking to develop the west of the country, as such a move could facilitate a process of industrial upgrading and boost investment.

"It will be a source for further global economic growth, as well as the origin of demand," Lin said.  

Investment in Africa will lead to a rise in local employment, raise the income of Africans and boost their consumption, thus helping China expand its overseas markets, Lin said.