The Asian Development Bank on Tuesday urged Beijing to loosen its grip on its currency, saying a more flexible exchange rate would benefit China as well as Asia-Pacific countries.

The Manila-based lender entered the fray in the mounting debate over the value of the yuan as it released its 2010 development outlook, in which it said China needed to boost domestic consumption to curb its dependence on exports.

International critics have accused China of keeping the yuan undervalued to give its exporters an advantage by making their products cheaper. Beijing counters that the policy is needed for its manufacturers' survival.

"Now as the global economy picks up it would be... in China's interests but also in the interests of the economies in the region to gradually shift towards greater exchange rate flexibility," ADB country director Robert Wihtol told reporters.

Speculation is growing that Beijing may soon alter its exchange rate policy as international pressure intensified for a stronger yuan -- effectively pegged at around 6.8 to the dollar since mid-2008.

The bank was backed by US President Barack Obama who said the yuan was "undervalued" and that a readjustment was in China's own best interest.

Obama said it was important that "currencies are tracking, roughly, the market and not giving any one country an advantage over another".

It is "very clear that in my estimation (the yuan) is undervalued," he said.

US Democratic Senator Chuck Schumer, a key author of legislation to punish China for its alleged currency manipulation, said Tuesday Congress must keep up pressure on China to revalue its currency.

Schumer had been asked whether US lawmakers should back off efforts to pile pressure on China over the yuan because of Beijing's apparent readiness to drop its opposition to new sanctions on Iran over Tehran's suspect nuclear program.

"To me it shouldn't, because to me, I mean, Iran is very, very important, but so are American jobs and American wealth, and because China manipulates its currency, we lose jobs, wealth flows out of the country daily," he said.

Obama told Chinese President Hu Jintao on Monday to adopt a more "market-oriented" exchange rate, but Hu said a policy shift would not help rebalance Sino-US trade.

The ADB also urged Beijing to step up efforts to boost domestic consumption, as a means of steering the nation away from its heavy dependence on exports and investment.

China should strengthen the social safety net and lift spending on education, healthcare and affordable housing to enable the country's 1.3 billion people to spend more on clothes and gadgets, the bank said.

"A greater emphasis on private consumption would promote economic growth and raise living standards," said the bank, which provides financial assistance to developing countries in the Asia-Pacific.

The ADB raised its 2010 growth forecast for China to 9.6 percent from its previous estimate in September for 8.9 percent growth.

The world's third-largest economy is likely to grow at a slightly slower pace of 9.1 percent in 2011 as the government phases out massive stimulus measures introduced to combat the global financial crisis, the ADB said.

The more optimistic forecast follows a similar one from the World Bank after the rapid turnaround in China caught economists somewhat by surprise.

The ADB growth outlook is markedly higher than the government's own 2010 target of around 8.0 percent.

China has powered out of the downturn -- it grew 10.7 percent in the fourth quarter of 2009 -- on the back of 586 billion dollars in stimulus spending and massive state-sanctioned lending.

A weaker-than-expected global recovery from the crisis and further trade disputes were the main risks for the future, the bank said.

China's next five-year plan, an economic blueprint set to be unveiled in 2011, was an opportunity for Beijing to "add momentum to restructuring efforts" necessary to ensure sustained growth in the years ahead, the bank said.

Policymakers -- who have acknowledged the need to retool the economy -- could establish new targets for boosting private consumption and set out the policy adjustments needed to achieve such a target, it said.

Expanding the services sector -- such as banking and insurance -- would "strengthen the domestic engine of growth, generate new sources of employment and raise living standards", the ADB said.

earlier related report
Outside View: Trade deficit
College Park, Md. (UPI) Apr 12, 2010 - Tuesday, the U.S. Commerce Department will report the February deficit on international trade in goods and services. Analysts expect it to increase to $39 billion from $37.3 billion in January. My forecast is in line with the consensus.

The trade deficit, along with the credit and housing bubbles, were the principal causes of the Great Recession. Now, a rising trade deficit and continued weakness among regional banks threatens to stifle the emerging recovery and keep unemployment near 10 percent through 2011.

At 3.1 percent of gross domestic product, the U.S. trade deficit subtracts more from the demand for U.S.-made goods and services than President Barack Obama's stimulus package adds. Moreover, Obama's stimulus is temporary, whereas the trade deficit is permanent and growing again.

Subsidized manufactures from China and petroleum account for nearly the entire deficit and both will rise as consumer spending and oil prices rise through 2010.

Money spent on Chinese coffee makers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.

When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services or the demand for what they make is inadequate to clear the shelves, inventories pile up, layoffs result and the economy goes into recession.

To keep Chinese products artificially inexpensive on U.S. store shelves and discourage U.S. exports into the Middle Kingdom, China undervalues the yuan by 40 percent.

Beijing accomplishes this by printing yuan and selling those for dollars to augment the private supply of yuan and private demand for dollars. In 2009, those purchases were about $450 billion -- 10 percent of China's GDP -- and 28 percent of its exports of goods and services.

In 2010, the trade deficit with China is reducing U.S. GDP by more than $400 billion, nearly 3 percent. Unemployment would be falling rapidly and the U.S. economy recovering more rapidly but for the trade deficit with China and Beijing's currency policies.

Longer term, China's currency policies reduce U.S. growth by 1 percentage point a year. The U.S. economy would likely be $1 trillion larger today but for the trade deficits with China over the last 10 years.

In negotiations with U.S. Treasury Secretary Timothy Geithner, China has suggested a 3 percent revaluation of its currency over the next year; however, such a small change would do little to change those numbers. In fact, because of Chinese modernization, the intrinsic value of China's currency rises each year. Hence, a 3 percent revaluation over the next year wouldn't even amount to the change in yuan undervaluation.

As the U.S. trade balance with China grew worse, Beijing could say "see exchange rates don't matter."

Obama must weigh much tougher action against Chinese mercantilism or China's trade policies will impose slow growth and high unemployment on the United States.

(Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)