EU: China’s Monetary policy Would Destabilize the World Economy

China’s exchange rate policy would destabilize the world economy, said European Commissioner for Trade Karel De Gucht on 27 September. “China artificially lowers the rate of the yuan, which is a negative factor. Thus, the PRC would destabilize the world economy” – Karel De Gucht said.

Despite a number of distinct advantages for Beijing’s currency intervention, in particular, a more comfortable environment for Chinese exporters, a strong national currency prevents the containment of the trade balance and foreign reserves – the first largest in the world.

In this case, according to the commissioner, the current situation also brings some of the advantages of the European economy, enabling consumers to purchase raw materials of Chinese products at lower prices. “The share of Chinese raw materials for European export is 75%. Thus, cheap Chinese imports indirectly helps our exporters,” – Karel De Gucht explained.

In early September 2011. Chinese authorities have announced plans to make the yuan freely convertible currency by 2015. Currently, the yuan is partially convertible currency – the government maintains tight restrictions on foreign exchange transactions involving the movement of capital. The renminbi is controlled by the Chinese central bank, the rate is determined by reference to a basket of currencies. At the same time the Western countries believe that the yuan is artificially undervalued, giving Chinese exports an unfair advantage. In order to control exchange Beijing has to sell yuan in the domestic market and accumulate huge foreign reserves, which in 2011. exceeded $3 trillion and growing.

However, in recent years China has gradually weakens the control over capital movements. For example, in August 2011. authorities promised to allow foreign investors to buy selected securities on stock exchanges in mainland China. Analysts say that such measures contribute to the internationalization of the yuan, and bring it, although slowly, to the status of international reserve currency.

In June, Dai Xianglong, former governor of the Bank of China, said that the yuan would become an international currency in 15 to 20 years. ( Previous Report )