A large appreciation in the value of China's currency would have an unfavorable effect, Nobel laureate Robert Mundell warned Tuesday, predicting that China's housing markets would go into recession.

 

If there were a big rise of yuan to the dollar, that would exert a "destroying" impact on the housing markets in Beijing and Shanghai and other Chinese cities, said Mundell, a professor of economics at Columbia University at a financial forum in Beijing. He did not further explain.

 

Many Chinese economists also hold the view that China's unsophisticated banking system, a major source for funds for property development, could not sustain a hefty rise in the value of the yuan.

 

But betting on the yuan appreciation, foreign investors have been buying and stocking new houses in China as a kind of yuan-denominated assets over the past few years, partly contributing to a property surge, the government acknowledges.

 

"Some people believe the RMB (another name for yuan, or renminbi) would rise, so all of them are focusing on speculation," Mundell said. "China needs to control excessive, speculative activities."

 

Mundell has long opposed a strong yuan appreciation. He told the Beijing forum that if the yuan rises too rapidly, prices of international goods and farm products would fall, and the Chinese banks' non-performing loan ratio would increase.

 

Earlier this month, Mundell, who won the Nobel Prize in economics in 1999 and is credited with laying the groundwork for the introduction of the euro, said a large increase in the international value of China's currency would threaten the country's economic growth and could wreak havoc on the region.

 

"A big appreciation would be a source of a major crisis in Asia," he told an investment conference in Seoul. "It wouldn't be the same as it was before, it would be a different kind of crisis," he added, referring to the devastation of 1997-1998 that wrecked economies including Thailand, Indonesia and the Republic of Korea.

 

China raised the value of yuan by 2 percent and started linking it to a basket of foreign currencies last July, scrapping its decade-old peg to the US dollar.

 

The yuan, is limited to moving 0.3 percent above or below each day's official exchange rate, has now risen more than 3 percent since July.

 

It breached the psychologically important barrier of eight yuan to the US dollar on May 15, but climbed back in the following trading days.

 

The United States argues the yuan's overall rise was too small to make a big dent in its huge trade deficits with China. American manufactures contend that the yuan is undervalued by as much as 40 percent, making US goods more expensive in China and Chinese products cheaper in the United States.

 

(Xinhua News Agency May 25, 2006)