As measured by the office of the US Trade Representative, the hourly wage of a Chinese industrial worker was $0.77 in 2006 while that of a US industrial worker was $18 to $20, more than 20 times greater. At what level can the appreciation of the renminbi make up for such a big difference?

In December 2006, the appreciation of the renminbi raised the price of China-made textiles and apparel sold for the US Christmas market by 5 percent. The price of toys rose by about 10 percent.

Most of China's exports to the US are basic consumer goods needed by the majority of Americans. The rapid appreciation of the renminbi will raise prices of these basic goods, increasing Americans' cost of living.

In his article "The Value of the Dollar", Ronald McKinnon, an economist at Stanford University, points out that a large depreciation of the US dollar against the renminbi could not remedy the savings imbalance between the US and China. Instead it could lead to a tide of unstable currencies resulting in deflation in China.

If the renminbi appreciates against the US dollar, and other Asian and even European currencies also appreciate against the US dollar, then inflation will return to the US, just as in the 1970s.

Professor McKinnon warned: "Unfortunately, due to constant pressures on China to appreciate renminbi against the US dollar, Paulson has departed from his alleged position of a strong US dollar. If China fails to withstand the pressure and greatly appreciates renminbi, it will then fall into the dilemma of deflation just like Japan in the 1980s and 1990s but its trade surplus will not shrink because of this."

Professor McKinnon's message is clear that the US is hurting China without getting any benefits through renminbi appreciation.

Economist C. Fred Bergsten said in January: "An increase of at least 20 percent in the average value of the renminbi against all other currencies will be required to achieve an orderly correction of the global imbalances."

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According to IMF statistics, by September 2006, of the aggregate foreign exchange reserves of all the countries, the US dollar accounted for 65.6 percent, the euro for 25.5 percent, and less than 10 percent of the rest was shared by the pound sterling, the Japanese yen, the Swiss franc and other currencies.

With the knowledge of the weight of China's economy in the world as well as the position of the renminbi in international finance, the sentiment is growing that the US, the EU and Japan should take the major responsibility in tackling the issue of world economic imbalance.

How much effect can the pressure of renminbi appreciation have?

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