Commerce Minister: Huge trade surplus to be reduced

By Jiang Wei (China Daily/Agencies)
Updated: 2007-01-16 07:30

Experts said Yuan Undervalued

The yuan is undervalued and further appreciation is needed to balance the economy, according to a report by the think-tank of China's Ministry of Commerce.

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"An undervalued yuan is just one reason for the imbalance of the domestic and external economy," according to the report by the Chinese Academy of International Trade and Economic Cooperation published on the ministry's Web site, www.mofcom.gov.cn on Tuesday.

It said China had to change the pattern of its trade and its model of economic growth, and yuan appreciation had an important part to play in that process.

According to the report, an appropriate rise in the yuan would do a lot of good for China: it would help to slow growth in China's trade surplus, which rose 74 percent in 2006 to a record $177.47 billion; it would also spur domestic industry to upgrade, ease tensions with trade partners and stimulate domestic demand.

But the report said it was up to China to decide the rate of the yuan's climb. The think-tank argued for caution.

"There should be a slow and gradual approach to exchange rate adjustment because that is what entails the smallest risks and would be most efficient," the report said.

It cited the example of Japan to illustrate how a spike in the exchange rate could hurt an economy.

Under pressure from the United States, Japan let the yen rise sharply, leading to a serious asset price bubble that burst with damaging economic consequences.

"That should be a lesson for China," the ministry said.

In the first part of the report, published on Monday, the think-tank said the current pace of yuan rise was appropriate and had little impact on China's trade.

It also forecast that the yuan will have gained 9-10 percent by end of 2007. Since it was revalued by 2.1 percent in July 2005, the currency has climbed a further 4.13 percent.

The report said it was difficult to pin down by how much the yuan was undervalued, with estimates by economists ranging from 5 percent to 30 percent.