Economist whose research led to creation of euro says China currency float could be 'devastating.'
June 10, 2004: 8:39 AM EDT
TOKYO (Reuters) - Nobel prize-winning economist Robert Mundell said Thursday that a possible move by China to adopt a flexible exchange rate system and float its yuan currency would be ``devastating'' and harm economic growth.
Debate is heating up about China's currency policy, which pegs the yuan in a razor-thin band from 8.276 to 8.280 per dollar -- a policy that critics say gives the country an unfair trade advantage.
Mundell said China's fast-growing economy was not yet ready to withstand the sort of dramatic currency fluctuations that neighbor Japan has weathered since its currency's peg of 360 yen to the dollar was relaxed in 1971.
"It would be devastating for China, a country that is still partly a planned economy... It would be very destabilizing to Chinese growth,'' the Canadian-born Mundell said at a seminar in Tokyo on ``an optimal currency system for Asia.''
Mundell, who won a Nobel prize in 1999 for his work on optimal currency areas, said that volatility in the euro could be a guide to what China should expect if it were to float the yuan.
"The dollar would bounce around and go down to five, up to 10 (yuan), if it replicated the European experience, and the European experience is treated as the paragon,'' he said.
Mundell's research on optimal currency areas in the 1960s is often cited as having laid the intellectual foundations for the creation of a European common currency, the euro, in 1999.
The euro fell to a record low of around $0.82 in October 2000, before rebounding 60 percent to a peak of around $1.30 hit in February this year.
Chinese central bankers say that moving toward a flexible currency policy is a long-term goal but they have made it clear they are in no rush and will not bow to international pressure.
Mundell, an economics professor at New York's Columbia University, said a common Asian currency was still a long way off, but that in the meantime Asian nations would be better off pegging their currencies to the dollar or yen to ensure stability.
The yen has also seen wild swings since it was floated, rising from 360 per dollar to an all-time high of around 78 in 1995, before falling back to roughly 150 yen in 1998.
Most economists believe the yuan will eventually be pegged to a basket of 10 currencies that would include the units of China's biggest trading partners -- the dollar, yen and euro -- and some Asian units.
