China is coming under increasing pressure to revalue its currency, the yuan, as a way to lower the country's huge and growing trade surplus.
At their recent meeting in Washington, finance ministers from France, Britain, Germany, Japan, Italy, Canada, and the United States repeated their call for China to allow its currency to float by letting the market determine its exchange value against other currencies.
Analysts say that with China's trade surplus continuing to rise sharply, the G-7 feels the issue has taken on new urgency. After the meeting U.S. Treasury Secretary John Snow departed from his previous view that China should make the currency adjustment at a time of its own choosing. Instead, he said the time for action is now.
This past weekend, China's central bank chief said mounting international pressure could accelerate China's plans to reform its currency regime. For more than 10 years the People's Bank of China has intervened in the market to hold the yuan value steady, at just more than eight to the dollar.
Researcher Morris Goldstein, of Washington's Institute for International Economics, believes China's currency is at least 20 percent undervalued against the dollar. He says the continuing steady rise in China's trade surplus, even as the price it pays for oil imports has risen, is proof that the currency is undervalued.
Mr. Goldstein says a revaluation of the yuan (also called the renminbi) would be useful in slowing what he believes is China's dangerously fast pace of economic growth.
"The exchange rate is the only instrument that can simultaneously reduce overheating of the domestic economy and reduce China's large underlying external imbalance,” said Mr. Goldstein. “Failure to move on the renminbi means China is also not doing its fair share in reducing global payments imbalances."
Another student of the Chinese economy, London Financial Times columnist Martin Wolf, believes China is making a mistake by holding such large balances of dollars as official reserves. China has nearly $500 billion in reserves. When China revalues, as Mr. Wolf is convinced it will, these dollar assets will have a reduced value.
China, says Mr. Wolf, is critical as it plays a dominant role in Asian financial policy.
"It is also the anchor for the exchange rate policies of effectively all other Asian countries. They will not move [against the dollar] if China does not," he said.
Mr. Wolf believes that to remedy global imbalances most developing countries in Asia need to revalue against the dollar. Standard economic doctrine holds that as a country's exchange rate rises its now-higher-priced exports slow and imports that have become less expensive rise
Hong Kong currency analyst Marc Faber tells Bloomberg News that he believes the Chinese currency should rise significantly.
"It is clear that over time the Asian countries will kind of de-peg from the U.S. dollar,” he noted. “Now, the big question in the case of China is at what level would you be comfortable of having the renminbi against the dollar? I think the renminbi could appreciate by 90 percent."
China has indicated that it favors a flexible exchange rate, but it continues to give no clue as to when it will ultimately abandon its fixed currency peg with the dollar.
