Economist urges caution on US approach to China

Washington, March 29: As US legislators consider a bill to force China to raise the value of its currency, a China trade expert and former International Monetary Fund economist warned that being confrontational would cause more harm than good.

In testimony before the Senate Finance Committee, Eswar Prasad, a senior professor of trade policy at Cornell University, said drastic US policy actions over the currency would simply poison US-China relations.

''Furthermore, this approach is unlikely to have a large or lasting impact on problems such as the US trade deficit or imbalances in the Chinese economy, and could make matters worse for everyone by creating instability in the global economy,'' said Prasad, who worked on China issues as a research economist at the IMF until he left late last year.

He said the United States could work with China in a way that generated results rather than just ''kicked up a lot of dust.'' Prasad said it would be more helpful if the United States worked with China to transform its economy.

''This would be win-win international financial diplomacy it would improve Chinese macroeconomic performance and defuse tensions abroad,'' Prasad added.

The US legislation is being developed by two Democrats and two Republicans that would force China to raise the value of the yuan against the dollar.

Many US lawmakers and manufacturers believe the Chinese yuan is undervalued by as much as 40 per cent, which gives Chinese firms an unfair price advantage in global trade.

The so-called ''veto-proof'' bill would need two-thirds support in both the US House of Representatives and the Senate to protect it from a veto by President George W Bush.

But Prasad argued that greater flexibility of the yuan, while important, was ''hardly an end in itself''.

It was more important to focus on what monetary policy framework would replace a fixed Chinese exchange rate that had helped China anchor inflation expectations, he added.

Prasad suggested China adopt an inflation objective a long-run target range as a new anchor for monetary policy.

''An inflation objective, coupled with exchange rate flexibility, would work best to stabilize the Chinese economy and enable policymakers to deal nimbly with various domestic and external shocks,'' he said.

Reuters