Nobel laureate: no worry about 'overheating' Chinese economy

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Last updated at: (Beijing Time) Friday, November 07, 2003

Nobel laureate: no worry about 'overheating' Chinese economy

China doesn't have to worry about an overheated economy, said Nobel Prize Laureate Mundell Thursday. That the RMB appreciation is "not a good idea" and will postpone the date for a convertible yuan.

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China doesn't have to worry about an overheated economy, said Nobel Prize Laureate Robert Mundell Thursday.

Mundell was here to attend the World Economic Development Declaration Conference (WEDDC) and was one of the drafters of the declaration.

China has seen a rapid growth of forex reserve this year leading to an increasing money supply, with which the economy is labeled overheated, but this is not a problem China has to worry about, he told the press at WEDDC, an economic forum running from Thursday to Friday at a coastal resort in south China's Guangdong Province.

The very slight inflation this year will counteract the deflation China had last year and the currency expansion will lead to a growth of import to balance China's export surplus, he said. This will adjust Chinese economy to a favorable status, he added.

According to the People's Bank of China (PBOC), the broad money supply (M2) increased 20.7 percent on a year-on-year basis in China by September this year while the narrow money supply (M1) up 18.5 percent.

The fast growing forex reserve is pushed strongly by commercial banks rather than overheated economy, Mundell said.

Those banks pour a huge amount of capital into China, predicting that the country will appreciate its currency and, intend to cash in, he added.

The PBOC said China's forex reserve added by 97.5 billion US dollars in the first nine months of this year, 51 billion US dollars more than that of last year.

By September, China's forex reserve totaled 383 billion US dollars.

RMB appreciation "not a good idea"

Mundell said that the appreciation of the RMB is "not a good idea". The RMB's appreciation will postpone the date for a convertible yuan, said Mundell. It will also lead to a depressed rural economy because of the reduced price of agricultural products, he added.

"It will cut economic growth to five percent or even lower, and cause more people in rural or urban areas to lose their jobs," he said.

He said it will also increase the country's heavy burden of non-performing loans, and influence the stability of China's monetary policy.

The appreciation will not last long, and subsequent depreciation will follow, he said. In addition, China will not maintain its credit in some neighboring countries where yuan is widely used.

A country should set the exchange rate between its own currency and the US dollar based on the local situation, Mundell said. "It is not a good idea for China to appreciate its currency now."

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