The debate over China's currency policy is heating up among economists with Morgan Stanley Asia Chairman Stephen Roach saying that a sharp upward revaluation of the yuan would lead to a disastrous outcome for the United States and it would end up as a "lose-lose situation" for both Washington and Beijing.
"I believe the currency adjustment that is being suggested by the West is the wrong way to go," Roach said in Beijing.
If China were to adjust its currency sharply higher, the Chinese share of the US multilateral trade deficits would shift to another country, a higher cost producer, which would have the effect of imposing a tax on American workers that the politicians are in theory trying to protect, according to Roach.
"This is a disastrous outcome for the United States and would certainly be a very bad outcome for Chinese exporters as well," he said.
Roach spoke as a storm is brewing between Washington and Beijing over China's currency policy. The US Congress is to hold a hearing this week during which American lawmakers are expected to force the Obama administration to take tough action against China for its "manipulation of currency". He said he was very worried about the outcome of the mounting trade friction between the US and China that he believed could lead to a series of escalating events between the two countries.
"The renminbi is the lightning rod in the post-crisis period. It is important for all of us to address this brewing storm before the clouds become too dark and there is actually lightning," he said.
In a debate with Nobel-winning economist Paul Krugman last week, Roach blasted Krugman's stance on tougher American action toward China, calling his advice "very bad" and "completely wrong".
"We should take out the baseball bat on Paul Krugman. I mean I think that the advice is completely wrong," Roach said. "We're lashing out at China rather than tending to our own business", which should be raising US savings, he said.
Krugman in a recent column accused China of keeping the yuan's value artificially low to benefit its exports and said the US may need to get more aggressive in its talks with China by treating the exchange rate as a countervailing duty or other export subsidy.