From overseas press

Four reasons a stronger yuan may backfire

(chinadaily.com.cn)
Updated: 2010-03-31 17:03

When the US is increasing pressure on China's revaluation of the yuan, it needs to seriously consider some possible unintended consequences of the yuan's appreciation, according to William Pesek's comment in his Bloomberg News column.

Pesek listed four reasons a stronger yuan may backfire.

First, a stronger yuan will accelerate inflation in the US. As US hasn't recovered from the recession, American consumers heavily rely on the cheap imported goods from China, said the article. "A strong yuan could devastate the 'Wal-Mart Economy'. It would be a shock to bargain-shoppers and U.S. inflation if those goods were to surge in price.."

Officials in Washington D.C. should not ignore the "consumer backlash", said Pesek.

Second, the upward pressure on the yuan may cause market turmoil. As US is pushing around China on currency issues, the war of words between China and US "will reverberate through markets everywhere", said the article.

"US and China are on a 'collision course' and investors are underestimating the disruption for global financial markets." Pesek quoted Harvard University economist Nouriel Boubini's warning.

Third, the yuan's revaluation may lead to a Chinese showdown. Pesek pointed out that China is still largely relying on exports, and appreciation of the yuan will slow down economic growth. "in a world devoid of economic engine, less growth in China is in no one's interest", said Pesek.

Fourth, an appreciation of the yuan will increase China's sphere of influence. Pesek believes more and more Chinese companies will purchase assets all over the world. They may buy the mining companies in Australia and New Zealand, even Google and Microsoft someday.

"An equally touchy issue is China's money going into Asia, Latin America and Africa at the expense of?America's strategic interests. Each increase in the yuan brings that day closer as China's money spreads around the world", warned Pesek.