Money

'Undervalued' yuan blamed for EU deficit

By Fu Jing, Zhang Chunyan and Li Xiang (China Daily)
Updated: 2011-05-14 09:39

BUDAPEST/BEIJING - The European Union's (EU) head of foreign policy, Catherine Ashton, has said an "undervalued" yuan is one of the reasons for the EU's "large bilateral trade deficit" with China.

However, Chinese researchers said the EU's policy of restricting high-technology exports to China is the main reason for the deficit.

The comments from the EU's High Representative for Foreign Affairs and Security Policy came after the yuan hit a new record high of 6.4948 against the US dollar earlier this week.

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"The (EU) Commission shares the view that the Chinese currency remains undervalued in effective terms," Ashton told China Daily in an exclusive interview, shortly before a second Strategic Dialogue with State Councilor Dai Bingguo on Thursday in Hungary, which currently holds the EU presidency.

Ashton said the EU would continue to support policies which "ensure the ongoing recovery and enhance the stability of financial markets, in particular moving toward more market-determined exchange rate systems, enhancing exchange rate flexibility to reflect underlying economic fundamentals, and refraining from competitive devaluation of currencies".

"The renminbi has appreciated against the US dollar but depreciated against the euro during the first quarter of 2011," she said, adding that the commission considers that exchange rates are "one reason among others behind the large bilateral EU-China trade deficit".

The yuan's exchange rate against the euro was 9.3043 on Friday.

"The US and the EU have no reason to press China on yuan appreciation, as the trade surplus is expected to fall sharply this year," said Yao Shujie, head of the School of Contemporary Chinese Studies and professor of Economics and Chinese Sustainable Development at the University of Nottingham in England.

"A sudden appreciation of the yuan has affected China's exports. China eked out a small trade surplus in March, but it was left with a $1.02 billion deficit in the first quarter, its first quarterly deficit in seven years," Yao said, adding that appreciation of the currency would not resolve the trade deficit between the EU and China.

"In order to reduce the trade deficit, one of the measures which the EU should take is to adjust its economic structure and expand its exports to China," said Yao, noting that the EU still "restricts high-technology exports to China".

Dong Yuping, a financial researcher at the Chinese Academy of Social Sciences, said a large and one-time appreciation under current conditions "will lead to greater financial instability as China lacks a market mechanism that reflects the real demand for its currency".

"A moderate and steady adjustment of the exchange rate is in China's interests, as it will give domestic enterprises, especially exporters, more time to digest the risks of a stronger yuan," said Dong.

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