NEW YORK — China might soon take a step toward allowing its currency to rise in value by pegging the yuan to a basket of currencies, including the dollar, the euro and the yen, a top Chinese economist said.
The yuan is pegged at an exchange rate of 8.28 to the dollar, a level that many economists consider undervalued by 10 percent to 40 percent. That has drawn the ire of domestic manufacturers and some U.S. politicians, who contend that it gives Chinese goods an unfair advantage.
“The real issue is how to change the regime to a managed, floating and more flexible one referenced to a diversified basket of currencies,” said Fan Gang, a Chinese economist, according to a summary of his remarks Wednesday at the World Economic Forum in Davos, Switzerland.
The recent slide of the dollar compared with the euro and other major currencies is one motivator for Beijing to shift its peg, he said.
“The U.S. dollar is no longer a stable currency,” said Fan, who works at the National Economic Research Institute at the China Reform Federation.
He predicted the yuan would rise in value by 4 percent to 5 percent over the course of the year as a result of this move.
While Fan is not a Chinese government official, his comments were reported by Xinhua, China’s state-owned news agency. Calls to the Chinese Embassy in Washington were not returned Thursday.
U.S. Treasury Secretary John Snow has repeatedly called on Beijing to allow the yuan to float freely. “They are taking steps — we are encouraged by those steps — but simultaneously, we say keep going,” a Treasury Department spokesman said.
U.S. manufacturers also said they hoped the move would be a step toward an unregulated exchange rate.
“Moving to a basket of currencies is helpful in moving China along the lines toward a totally freely floating currency,” said Frank Vargo, vice president of international economic affairs at the National Association of Manufacturers, a Washington lobby group. What he’s waiting for, though, “would be a quick revaluation upward.”
Economists determine whether a currency is fairly valued by comparing the cost of an assortment of similar staple items, such as food, in two countries.
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China manages its exchange rate against the dollar by investing in U.S. currency and debt and printing additional yuan. That effectively restricts the supply of U.S. currency while increasing the supply of yuan. Currently, China’s U.S. currency reserves come to about $600 billion, Vargo said.
Andrew Bernard, professor of international economics at Dartmouth College’s Tuck School of Business, said it would be logical for China to peg its currency to the dollar, euro and yen “because their trade is spread across those three groups.”
He said he believes the yuan is undervalued by 10 percent to 30 percent, but added, “the amount of undervaluation is not unusual at all for a pair of currencies.”