With Washington threatening to adopt a tougher stance on China's currency and trade policies, Beijing has warned against the economic fallout of mounting international pressure for it to revalue the yuan.

A woman and her son get a close-up view of a blown-up 100-yuan note at an exhibition in Beijing. With Washington threatening to adopt a tougher stance on China's currency and trade policies, Beijing has warned against the economic fallout of mounting international pressure for it to revalue the yuan. [China Daily HK Edition]

Government officials and economic researchers fear that the country's robust economic growth may be shadowed by uncertainty by the US moves to launch a trade war with China in a bid to force change.

Zhu Hongren, an official in charge of economic operation with the State Development and Reform Commission, recently described growing calls led by the United States and Japan for a stronger yuan as a big challenge to the Chinese economy in the next few months.

He stressed that the demand for a yuan appreciation and emerging global trade protectionism are two major external problems that pose a threat to China's economic development.

Although the official did not elaborate, his comment signals Beijing's deep worry about the impact of any punitive measures that Washington might take.

"China may suffer a huge economic loss from only intimidation about a trade war even if the threat does not materialize at all," said Professor Hai Wen, deputy director of the China Centre for Economic Research at Peking University.

"Even an implication of a looming trade war can lead to business uncertainty and sharply undermine bilateral trade ties."

The professor added that public confidence in economic prospects will be damaged by threatened trade sanctions over a long period.

His warning came after the Bush administration stepped up its criticism of Beijing's alleged manipulation of its currency to keep the yuan artificially low and gain a trade advantage on US-based manufacturing.

US manufacturers claim that they have shed some 2.7 million jobs over three years in part because the yuan is too cheap at its peg of about 8.28 to the US dollar.

But Beijing is determined to defend the stability of the yuan while insisting that the price advantage is mainly based on cheap labour costs rather than an undervalued currency.

US officials have also accused China of a host of trade violations and trade barriers while making uneven progress in liberalizing trade and foreign-investment rules.

As domestic calls for a free-floating yuan have increased, some US legislators have even introduced legislation that would impose an across-the-board 27.5 per cent tariff on Chinese products.

Despite the grave situation, Professor Hai confidently predicted that China and the United States can avert a general trade war through constructive negotiations.

That's because neither of the two governments can afford tremendous political and economic losses if a long-drawn trade war really breaks out, according to the professor.

Sino-US trade amounted to over US$100 billion last year, with America becoming China's biggest export market.

In the meantime, inexpensive and highly-competitive Chinese goods have become popular with most American customers in their daily lives.

Professor Hai, however, conceded that a partial trade war may be inevitable if Sino-US trade disputes escalate and become politicized.

The US trade deficit with China jumped 13.5 per cent to a record US$11.34 billion in July from US$9.99 billion in June; while imports from China totalled US$13.4 billion in July, a monthly high.

The US ran a US$103 billion trade deficit with China during 2002, the biggest deficit America had with any single country.

As one of the first signs of political interference in the trade issue, President George W. Bush has seemingly caved in to political interests to ratchet up pressure on China to win support for himself in the run-up to next year's presidential elections.

Chen Yulu, vice-president of the School of Finance at Renmin University of China, suggested Beijing take positive steps to curb widening deficit with America as a major way to appease the US anger.

The measures may include increasing imports from the United States to narrow the yawning trade gap and opening wider to US investment.

On the other hand, Chen also urged the Chinese Government to provide domestic enterprises with more policy and legal help such as anti-dumping and anti-subsidy laws to prepare them for potential trade disputes.

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