EDITORIAL: Revaluation of the yuan

The United States and other countries are increasing the pressure on China to revalue the yuan for appreciation. Beijing, meanwhile, is toughening its attitude.

But if we consider the situation logically, it is apparent that a gradual appreciation of the yuan will be beneficial for China as well.

The Chinese central bank has intervened in the currency market by selling yuan and buying U.S. dollars to maintain an exchange rate for 20 months at 6.83 yuan for $1.

Western countries and developing countries alike are protesting China's onslaught of exports that ride the wave of this artificially weakened yuan. In a recent news conference, Chinese Premier Wen Jiabao rebutted, saying such pressures on the yuan are akin to protectionist movements. That sort of attitude is the basis of the argument that China is arrogant.

The energetic momentum of the Chinese economy is indeed amazing; it quickly emerged from the global financial crisis through Beijing's huge fiscal stimulus and returned to the fast-growth track. In light of such growth, it would not be difficult for the Chinese economy to absorb the effects of a stronger yuan, rising export prices and falling import prices.

Perhaps China should try its hand at relaxing its intervention measures. Beijing embarked upon reform of the yuan in July 2005 and eased its exchange market interventions for a while.

During the three years since then, the yuan rose against the dollar by about 20 percent. Even then, the Chinese economy continued to grow by 10 percent. Surely there is no need for Beijing to have a "high-yuan phobia."

Of course, the weaker yuan makes it easier to maintain the competitiveness of China's exports, while higher prices of imports protect Chinese companies and farmers from competition. We can understand why Beijing would be eager to protect domestic employment to maintain social stability.

However, the dangers of a weak yuan are becoming increasingly visible.

Due to Beijing's intervention in the currency market, a glut of yuan has formed domestically, and the excessive money is flowing into the real estate market.

In February, land prices of 70 major cities rose by 10.7 percent from a year earlier.

Commodity prices are also rising gradually. The Chinese government increased interest rates in an effort to cool down the overheating economy, but the efforts were negated.

On the other hand, revaluating the yuan and making it stronger would have merits. Imports, including foreign resources and technology, will become cheaper. It would also put pressure on inefficient companies to innovate in order to survive.

Under the 1985 Plaza Accord, Japan gave in to pressure by the United States and other countries to appreciate the yen. Tokyo tried to negate the effects by expanding domestic demand, but those efforts led to the asset-inflated bubble economy.

Japan has been suffering from deflation ever since that bubble burst. It is only natural that China would want to avoid the same mistakes.

However, being fearful of a higher yuan now will only necessitate a drastic adjustment later on. To avoid that situation, China should begin the policy shift, if only gradually, to create benefits in the long run.

We hope Beijing will learn from Japan's experience.

--The Asahi Shimbun, March 22