By Brian Love
PARIS, Feb 2 (Reuters) - Chinese exchange rate appreciation will not in itself solve the economic problems of the United States or the rest of the world, IMF chief economist Olivier Blanchard said in an interview with Reuters.
A 20 percent rise in the yuan, also known as the renminbi (RMB), and other major Asian currencies would at best lead to a rise in U.S. exports worth 1 percent of gross domestic product, International Monetary Fund estimates suggest, he said.
"So what the simulations say is a major revaluation of Asian currencies would help the rest of the world, but is not a panacea to sustain growth in the U.S. or other advanced countries," Blanchard said in an interview conducted on Friday.
"I think it's very important not to bash China over the RMB. What China should do, and is actually doing, is to decrease its saving rate, thus increase domestic demand, and reorient production to satisfy this higher domestic demand," he said.
"It is in this context that an appreciation of the RMB makes good sense, both to reallocate resources and to avoid overheating. This would be good for China, and good for the rest of the world."
The International Monetary Fund has for some time argued that China's exchange rate is too low and IMF chief Dominique Strauss-Kahn reiterated last week that the yuan was "really significantly undervalued".
Blanchard said the IMF simulations on the likely impact of a rise in the yuan exchange rate, involving five regions and some 2,000 equations that took account of trade flows and openness of various economies, gave only a rough indicator but was "as good a model as exists" and offered a useful measure of magnitude.
The Organisation for Economic Co-operation and Development said on Tuesday China needed to run a fiscal deficit and let its exchange rate rise to, as the IMF's Blanchard argued, tilt the economy towards domestically driven growth, reducing reliance on exports. After a global downturn where world GDP dropped 0.8 percent in 2009, according to latest IMF estimates, Asia, led by China, has already recovered a potential growth rate that Blanchard described as "very high".
China's growth rate is forecast to accelerate this year to 10 percent according to the IMF and 10.2 percent according to the OECD, more than four times as fast as the average forecast for the long-industrialised nations. China GDP grew 8.7 percent in 2009, when GDP fell across the industrialised world.
BUBBLES
After the global downturn and a subsequent Asia-led recovery that has further fuelled debate about the need to tackle asset price bubbles, Blanchard said the primary job of central banks was to ensure low and stable prices but something should be done too to better detect and blunt undesired asset price swings.
Loan-to-value ratios were a specific channel of influence over house prices, he said by way of example.
Central banks could adjust policy interest rates to ensure price stability in a broad sense but the policy interest rate was too blunt a tool to deal with specific pockets of trouble.
"The question is how much flexibility the central bank should have in meeting this goal (of price stability), and whether and how it should react to developments other than inflation," said Blanchard.
"If we can improve the macroprudential framework enough, then monetary policy can concentrate on the use of the interest rate to affect aggregate activity," Blanchard said.
"When there is what looks like a bubble or some strange pricing in a particular market, the idea of using the interest rate to address it at the cost of potentially large macro collateral damage seems like a bad idea," he said.
Blanchard requested a transcript of his interview before approving on Tuesday the remarks carried in this story. (Editing by Andy Bruce)