Economist Zhu Min related a story about his foreign friend renting an apartment in Beijing: "David once told me that Chinese are not very conscious of exchange rate risks. An example is his landlord, who inked a three-year US-dollar-paid leasing contract."

To David's joy, however, the landlord also allows him to pay in renminbi, said Zhu.

In this way, all the exchange rate risks, if any, would be shouldered by the property owner.

Zhu was not, however, chatting with his friends over after-dinner tea. He was addressing a high-profile conference on reform of the exchange rate regime.

The two-day conference, which concluded on Wednesday, was hosted by the Center for International Finance under the Beijing-based Central University of Finance and Economics, the Journal of Studies of International Finance under the Bank of China, and the Chinese Economic Association (United Kingdom).

On this occasion, Zhu, the economic adviser to the president of the Bank of China, was certainly not talking trivia to entertain the guests.

"The real situation is few measures have been taken to ward off risks that may be possibly incurred by China's foreign currency deposits," said Zhu.

"Since 2002, we have not seen significant changes in people's US-dollar deposits, while foreign currency borrowing denominated in US dollars has increased dramatically. Despite the trend, however, people are just subconsciously hedging against possible losses. A workable plan (against exchange rate risks) is yet to be devised," added Zhu.

Zhu's worry is not unfounded since the international community, especially US, pressure on Chinese policy-makers to revalue the renminbi has never abated.

The latest reaction from Washington was conveyed by its Treasury Under-secretary John Taylor, at the Asia-Pacific Cooperation finance ministers meeting early this month in Santiago, Chile.

Taylor said after the meeting issued its communique, that he was "particularly pleased" that the ministers expressed support for more flexible currency regimes.

Seemingly weakened as the wording is compared with previous threat-like demands, the US has unambiguously expressed its stance: the renminbi should be revalued.

China's political issues are not the only care of Washington. The US has increasingly attached importance to wielding its influence on China's economic policy-making in recent years.

The openly claimed cause is globalization, which means one country's economic activities spilling over the borders of others throughout the world.

In other words, Washington seeks to ease its domestic economic woes by pressing China to change its economic -including the current exchange rate -policies.

This has proved true by both experiences in recent years and by historical records.

Whenever the US trade deficit rises, or unemployment mounts or presidential election nears, China will become, as now and before, an issue. "Dumping," "unfairly subsidizing exports" and "significantly undervalued renminbi" are frequent accusations against China's policy-makers.

In the first quarter of this year, the US current account deficit registered US$144.9 billion, up 4.6 percent over the fourth quarter of last year. Its trade deficit in June stood at US$55.82 billion, about a US$9 billion rise over May.

For a historical perspective, the late 1960s economic boom in Germany and Japan, coincided by domestic economic gloom, has made the US government press the other two to reconsider their exchange rate policy. And given the US clout in the international community, Washington can often attain its goal.

The current US clamor to revalue the renminbi is not well founded, however.

The exchange rate is not so powerful as to have much bearing on the US economy.

In the US dollar index, which reflects the value of the US dollar through composite calculation on the basis of its exchange rate with other major currencies, renminbi has a bearing of less than 10 per cent, according to Cao Honghui and Yan Xiaona, researchers from the Chinese Academy of Social Sciences.

This means even 10 percent of any rise in renminbi value will only affect 1 percent of the value of the US dollar and will not significantly improve the US current account balance scenario, according to researchers.

If China revalues its currency, blunting the competitiveness of its products, then other low-cost countries will take the market share in the United States.

"For Washington, it remains a zero-sum game," said Chen Zhi'ang, a researcher with the School of Finance under Hangzhou University of Commerce.

"The international division of labor that is based on labor comparative advantages, will not be easily adjusted by exchange rate changes," he added.

US policy-makers and industrial experts had better look at their own industrial defects for answers to their trade and industrial down-cycle.

China does not preclude the possibility of floating its currency in the long run. But the Chinese economy only accounts for 3.5 percent of the global total and its trade volume, although expanding year by year, only makes up 5 percent of international trade. A change in the exchange rate, if it was to happen, would not solve the many problems the world economy faces.

Since this issue is highly sensitive, any change, however slight, may produce unbearable consequences.

"Critics often ask me if I am too cautious in dealing with the exchange rate regime?" said Wang Chuanlun, a researcher from the School of Finance at Renmin University.

"A responsible government, however, must exercise caution in making policies concerning such a major change," he said.

If the renminbi is abruptly appreciated, the Chinese economy would suffer greatly. The health of trade and economic growth will be at stake.

China would not be the only victim if it interacted with the US economy.

And here we return to Zhu Min's story about tenant David and his risk-taking landlord: "I think David forgot that his salary is paid in US dollars. He is not riskless."

(China Daily September 15, 2004)