Canada, the U.S.' largest trading partner, is another example, BBH's Chandler noted. "The Canadian dollar has appreciated markedly in recent years, but the U.S trade deficit with Canada is bigger today than it was a year ago or five years ago," he said.

Backfire?

Some analysts warned that a sharp and sudden move of the yuan/dollar exchange rate may pose risks for the U.S. economy.

A rise in the yuan would reduce China's appetite for U.S. treasury bonds, leading to a rise in U.S. interest rates, said MG Financial's Laidi. Chinese investors held $262.6 billion in U.S. Treasurys in January, according to the Treasury Department.

"That would really hurt the U.S. housing market, which is already slowing," Laidi said. "It would hurt the U.S. economy and would hurt the rest of the world's economies."

Brian Dolan, head of currency research at Gain Capital, cautioned that a sharp appreciation of the yuan would import significant inflationary pressure into the U.S. economy.

But BBH's Chandler said any substantial inflationary risk would be minimal.

Instead, he foresees that if the yuan were to float in the open market, the greater risk lies in the possibility that speculative money betting on yuan appreciation would flow out and look for another play. Meanwhile, corporations would also find it easier to repatriate profits and the rising middle class in China, like their counterparts in other developing countries, would likely put some of their savings off-shore.

Therefore, "letting the renminbi float with open capital markets could very well see the renminbi fall," Chandler said.

Manipulator?

Over the weekend, the European Union and Asian finance ministers said at a meeting in Vienna that China's currency regime should become more flexible.

Their comments followed a statement from U.S. Treasury Undersecretary Timothy Adams on Friday, who said China has been "far too cautious" and should act "now" to allow greater flexibility in the value of the yuan. He didn't say if the U.S. would accuse China of manipulating its currency in a report due from Treasury this spring.

A number of lawmakers have introduced bills that would punish China unless it moves toward a free-floating currency. Sens. Lindsey Graham, R-S.C., and Charles Schumer, D-N.Y., agreed to postpone a vote on the most high-profile bill after a recent visit to China.

MG Financial's Laidi said the U.S. threat to name China as a currency manipulator is "unfounded."
"China is not engaging in manipulation. It's allowing the currency to appreciate, by 1% since the revaluation," he said. "Many countries have some sort of arrangement in their own currency against the U.S. dollar. But the U.S. does make noise about China because China has the highest currency reserves in the world."

BBH's Chandler said over the past months, China has taken many steps, such as introducing a market-maker system, to build the institutional capability and mechanisms that allow for a more flexible currency.

"How can a peg-which is no longer a peg, be considered manipulation? The renminbi was pegged to the U.S. dollar when the dollar was strong in the second half of the 1990s and when the dollar was weak as in the last half decade," Chandler said.

But Gain Capital's Dolan said there's little possibility of that happening.

"The election pressure is building, so there is more domestic pressure to name China as a currency manipulator," said Dolan. But "it'd be huge diplomatic slap in the face. I think they'll [Treasury] find a way to avoid doing that to keep the diplomatic situation on an even keel."

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