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China should combat speculation over the renminbi's appreciation by controlling the pace of the currency's rise in value, said Justin Lin Yifu, a well-known economist.

 

If the currency is allowed to appreciate, the exchange rate's annual change should be less than 3 percent, Lin, a member of the Chinese People's Political Consultative Conference (CPPCC) National Committee, told China Daily in an exclusive interview.

 

"We should stick to the approach of ensuring adjustments (to the yuan's exchange rate) are small in scale and bearable," said Lin, a professor at Peking University.

 

The annual lending rate in the international market is about 5 percent, while the renminbi's annual interest rate for savings is 2 percent, so a 3 percent or bigger increase in the yuan's value would make speculative activities aimed at appreciation profitable, Lin said.

 

In July 2005, China abandoned the renminbi's decade-old peg to the US dollar and allowed its currency to appreciate by 2.1 percent. Since then, the yuan has gained almost another 5 percent against the dollar.

 

However, the United States blames its colossal trade deficit on what it claims is a seriously undervalued renminbi and has been pressing China to allow for a bigger revaluation.

 

Noises from the US, together with China's swelling trade surplus, have encouraged speculators to bet that the renminbi will appreciate at a quicker pace.

 

Lin said a major cause of the 70 percent annual increase in China's trade surplus last year was cheating traders who falsified the prices of the goods they traded, aiming to cash in on speculative profits from a rising renminbi.

 

This, in turn, further intensified speculative pressure on the Chinese currency.

 

Other economists have said anticipation that the yuan would appreciate rapidly had triggered other problems, such as foreign buyers snapping up property in big cities.

 

"The imperative now is to dispel the speculative anticipation for the renminbi's appreciation," Lin said.

 

Lin said he believed the renminbi's exchange rate was at a reasonable level.

 

The country's huge trade surplus is not sufficient reason to allow the renminbi to appreciate further.

 

In the aftermath of the 1997-98 Asian financial crisis, when the renminbi was believed to have been overvalued, China's trade surplus was 12 percent of its total trade volume. But last year the surplus was 10 percent of total trade volume.

 

In addition, China's surplus-to-gross domestic product ratio is lower than almost all other Asian countries, including Japan, South Korea and Malaysia, Lin noted.

 

Lin said the renminbi's exchange rate had become a political issue because of the pressure from the US.

 

"A political problem should be tackled in a political way," he added.

 

Lin said people in the US who had been advocating for their government to exert more pressure for the yuan's appreciation actually did not understand the issue.

 

"We cannot ignore them. But we should not pay too much attention to them either," he said.

 

(China Daily March 5, 2007)