There is no doubt that the stable renminbi (RMB) exchange rate, pegged at about 8.25 yuan to the U.S. dollar, has helped China's economic development. It has brought about enormous production capacity in the export industries. Meanwhile, the sharp increase in exports to the United States has prompted America to pressure China to revalue the RMB. Earlier this year, Zhou Xiaochuan, governor of the People's Bank of China, said China planned to improve the mechanism for determining the RMB exchange rate.
Revaluing the RMB vis-a-vis the dollar could be like opening a Pandora's box. As the U.S. trade deficit is unlikely to decline significantly, the U.S. could claim that any revaluation was inadequate and demand further revaluations, as it did with Japan. The market would respond, driving the RMB to fluctuate wildly at the sacrifice of China's economic stability.
Alternatively, China could peg the RMB to a basket comprising the dollar, yen and euro. John Williamson of the Institute for International Economics proposes a respective dollar-yen-euro ratio of 35 to 40 percent, 30 to 35 percent and about 30 percent.
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