Yuan must appreciate to curb inflation

NEW YORK (CNNMoney) -- It's been a remarkable recovery for China, but now the fast-growing economy is fighting runaway inflation, and experts say the country must allow its currency to appreciate to stay on course.

"The right thing for China, the United States and the world is to let the renminbi appreciate," said Barton Biggs, managing partner at New York-based hedge fund Traxis Partners, at the Bloomberg China Investment Strategies Conference Wednesday. "And the best way for the world is a gradual, 7.5% or 8% annual appreciation.

The People's Bank of China took steps last June to allow the yuan to trade more freely against the dollar. But since then, the Chinese currency, also known as the renminbi, has only increased about 3.5%.

Biggs, who calls himself a bull on red hot emerging markets, said if the yuan does not increase in value, China will face the threat of broad inflation, particularly with wages -- a situation that is already playing out.

China has been facing increasing international pressure, especially from the U.S. government, to let the yuan appreciate to improve trade balances.

Ahead of last month's visit by Chinese president Hu Jintao's, Senate Democrats introduced a bill that would impose penalties, including possible tariffs, on nations that manipulate their currencies, namely China.

Sen. Charles Schumer, a Democrat from New York and one of the biggest Congressional critics of China's currency policy, argues that the yuan is artificially undervalued by as much as 40%. He says that's hurting American manufacturers and slowing the U.S. economic recovery.

But Gary Shilling, president of investment advisory firm A. Gary Shilling & Co., argued that a higher valued yuan won't help lower the United State's trade deficit.

"If you see the yuan rise, you'll just see more Chinese export companies move to Vietnam and Bangladesh," said Shilling at the Bloomberg conference, calling the U.S. government's push for a higher yuan a "cheap political shot."

Shilling added that allowing the yuan to trade freely against the dollar could actually lead to further depreciation of the Chinese currency, as it could prompt investors to shift their money into other higher yielding assets.