Proposed U.S. legislation seeks to push China to raise the value of yuan

March 29, 2007

Eswar Prasad, a professor at the trade policy from the Cornell University, warns the United States legislators, that their bill could poison the relationship between USA and China.

This warning was given regarding the U.S. bill, which is meant to force China to raise the value of its national currency yuan. Currently yuan has a value, which is about 40% lower than it should be, as stated by the legislators, which gives the Chinese trading companies a huge advantage on the international trading ground.

Professor Prasad, who was a China trade expert and an economist at the International Monetary Fund until late last year, said that this bill would not have a long lasting effect and would not influence the problems the legislators are trying to avoid.

The opinion of the China trade specialist was that the USA should try to collaborate with Chinese officials in order to fix the problem of U.S. trade deficit and the current instabilities in the Chinese economy. The strategy to force the Chinese Government to do something would only worsen the relationship between the two countries.

The expert's opinion was it was more important to concentrate on the question what framework of the monetary policy could substitute the fixed exchange rate of the Chinese currency, which helped China in anchoring the inflation expectations.

Mr. Prasad added that the best way to stabilize the Chinese economy would be to couple an inflation objective with a flexibility of exchange rate.

The bill needs two thirds of the votes both in the U.S. House of Representatives and in the Senate, in order President George W. Bush would not have the possibility to veto the bill.