To the average member of the US Congress, the world is a simple place - if China can be pushed to let the renminbi float free or at least be revalued, the US trade deficit with China will disappear and US manufacturing jobs will magically reappear.
They are in for a big disappointment. Under huge political pressure, China may allow more flexibility in the exchange rate - as indicated by central bank announcements in June - but currency movements alone cannot correct the huge imbalances between China and the rest of the world, much less revive US manufacturing in industries in which it is no longer competitive.
By contrast, the scale of Chinese manufacturing, its first-class infrastructure and the productivity and cheapness of Chinese labour all give this export machine a huge advantage of much greater significance than the exchange rate. A higher-valued renminbi would not stop this juggernaut - rather, it would slow down inflation and force Chinese manufacturers to introduce new technology to become even more competitive.
Unhealthy imbalance
US Congress members are right in one respect, however - it is unhealthy to have a long-running trade imbalance between these two giant economies, to the tune of $227bn in 2009. The crux of the matter is not the exchange rate but how China uses its export earnings. Instead of channelling them for the benefit of the ordinary Chinese - many of whom do not have access to affordable education or healthcare - China invests them pointlessly in US treasuries. China owns roughly one-third of the $2500bn US treasury market and its actions push down yields and helped fuel the global asset bubble that ended in financial collapse.
China's own economy is in danger of getting out of control with its own asset bubbles and hikes in wages following labour disputes. Chinese banks will be the first to get hit if all this unravels.
China's philosophy of gradualism has served it well in the 30 years since the Open Door policy came into effect, promoting market forces. But it now needs to move on much more than its exchange rate to solve the imbalances and to protect its own economic well-being as much as that of the US.
