International | May 12 2006
By Chris Shaw (Tokyo)
Pressure continues to be applied to the Chinese government in an attempt to force the country to revalue its currency, but not everyone is convinced such a revaluation is in the best interests of its economy or that of Asia generally.
Columbia University professor and Nobel laureate Robert Mundell takes the view a significant appreciation in the renminbi could bring to an end China’s strong growth and so threaten growth throughout the Asian region.
He argues an increase in the currency could put pressure on the banking system, which like the Japanese banking system of ten or so years ago is considered weak at best thanks to high levels of bad debts.
Mundell also suggests any significant revaluation of the currency could produce a deflationary environment (again, like the last 15 years in Japan) that would result in higher unemployment and lower levels of foreign investment. On Mundell’s estimates, such an outcome could see growth halve to around 5% from current levels of just over 10%.
Such an outcome is likely to have implications beyond just the level of growth in China, with the entire region likely to suffer. As Mundell notes, the new Asian economic integration structure where countries like Japan and Korea send goods to China to be finished before exporting to the US, would also come under threat.
Such an outcome would clearly be a negative for the global economy, as the Asian region has been one of the drivers of world growth as the pace of US growth has slowed recently.
