In an ideal world, China would allow its currency to appreciate some 5 percent each year for the next five years. A yuan that is 25 percent stronger would be appropriately valued, and the U.S.-China trade imbalance would fade, no longer threatening the relationship between the two countries and, by extension, the global economy.U.S. policymakers need to do (and should do) very little to achieve this. The economic logic of reforming China's currency policy is compelling, for China as well as the United States. A stronger yuan would enrich Chinese households, lowering their cost for imported goods. It would also enable China to purchase the global assets it covets, from U.S. technology to African raw materials.
This logic guided Chinese policy before the Great Recession, with the yuan rising almost 20 percent between summer 2005 and summer 2008. Chinese authorities reasonably halted further moves when the global financial panic hit, but in recent months, with more stable conditions, they have resumed revaluation. It hasn't been as fast as policymakers would like, but it signals that the Chinese accept the logic behind a more flexible currency.
U.S. policymakers may be tempted to use a stick, such as greater tariffs on Chinese imports, to induce faster currency appreciation. But this would be counterproductive, stifling both Chinese imports and, as China retaliates, U.S. exports. This is a scenario for a new global recession. Currency revaluation is vital and logical, for China's own sake as well as ours, but the case must be accepted on its merits, not because of threats.
The head of the International Monetary Fund on Friday urged global finance ministers to stop trying to manipulate their currencies for economic advantage and instead to join together to save a fragile recovery.
For more: What to do about China's currency?
Cartoon: Dave Granlund
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