GENEVA — A sharp revaluation of China’s yuan to help correct the huge U.S. external deficit could prove counterproductive and have a dampening effect on the world economy, a report by a United Nations agency warned.
Such a move, strongly advocated by U.S. manufacturers adversely affected by cheap Chinese imports, would have a “deflationary” impact on the world economy, said the report by the U.N. Conference on Trade and Development.
U.N. economists estimate that it would require a 67.4 percent revaluation of the yuan, a 74.1 percent revaluation of the yen and a 37.2 appreciation of the euro, plus a 5.6 devaluation of the dollar, to reduce the U.S. deficit to 5 percent of gross domestic product.
Supachai Panitchpakdi, who took over on Sept. 1 as UNCTAD secretary general after three years as chief of the World Trade Organization, told a news conference that “these imbalances in the world economy are not a healthy affair,” and stressed they need to be corrected.
The way to adjust the global structural imbalances without triggering deflationary effect, UNCTAD said, is if Japan and the European Union countries drastically boosted domestic demand.
UNCTAD said the bulk of the counterpart to the huge current account deficit is to be found in the surpluses of the EU and Japan. “These surpluses are growing rapidly despite rising import bills and other primary commodities. Japan and Germany together accounted for $268 billion, or about 30 percent, of the combined global current-account surplus for 2004,” noted UNCTAD’s “Trade and Development Report, 2005.”
By comparison, the current account surplus of East and South Asia totaled only $193 billion. China, with $70 billion, accounted for less then 8 percent of the global current account surplus, it noted.
On July 21, China abandoned the yuan’s decade-old peg to the dollar and replaced it with a basket of currencies, which led to an initial 2.1 percent appreciation of the currency.
However, critics said the amount is not considered sufficient and claim China’s currency is undervalued by up to 40 percent versus the dollar, which gives its exporters an unfair advantage.