A sensible currency policy is one of the most important ways a country controls its economy.

Economic development and international balance should both play a part in determining exchange rates.

A stable exchange rate for the renminbi provides a stable support for the economy to maintain its annual 7 to 8 percent growth. It is also one of the main factors that propel growth in China's international trade, foreign investment and foreign exchange reserves.

In fact, the changes in the renminbi exchange rate could be said to reflect the changes in the Chinese economy.

By 1994, the renminbi had depreciated to half its 1986 rate against the US dollar. But as the Chinese economy began to boom, it rose again. Between 1994 and 2002, the renminbi appreciated 18.5 percent against the US dollar.

Figures from the International Monetary Fund show that the renminbi appreciated 21.5 percent against the currencies of China's major trade partners between January 1994 and September 2002.

China's sustained, sound economic growth is matched by its financial conditions and the supervision mechanism that is in place here.

In addition to the international surplus and increasing foreign exchange reserves, there are several other factors pressurizing the renminbi.

China's dual surplus in the current account and capital and financial accounts is a direct result of the nation's foreign exchange policy. This is also why the foreign exchange reserves have grown rapidly. The policy aims to keep foreign exchange within the country, and demand from banks, companies and individuals is thus suppressed. Meanwhile, individuals and businesses seeing weakening impulses make investments with foreign currencies.

The turbulence in the financial markets in Western countries is fast spreading around the globe. Expected returns on investments are shrinking. It means investors are now keener to sell their foreign cash to the banks rather than invest it.

The fairly high but stable interest rate of the renminbi also adds to the upward pressure on the renminbi, and the difference in interest rates between renminbi and other currencies attracts overseas money into China.

But in the face of this mounting pressure on the renminbi, at least one point needs to be clarified: China's exchange rate policy is not the cause of global deflation and revaluing the renminbi will not ease the situation.

Despite its vigorous growth, China's GDP accounts for only 3.5 percent of the world total. China's trade takes up a mere 5 percent of total global trade volume.

Multinational companies choose China because they are eyeing its huge market and its economic progress rather than the undervalued currency.

Their choice is also the reason for a rising trade deficit between the United States and China. The US used to import Asian products from Japan, the Republic of Korea and China's Taiwan Province. As the international industry giants move their manufacturing bases from these areas to the Chinese mainland, China sees more trade surplus with the US and with it, more trade deficit to these economies.

China's robust growth has played a key role in lifting the world and East Asian economies out of the financial crisis of the late 1990s. This growth could be delayed by an appreciation of the renminbi and East Asia could suffer economic turmoil.

In fact, a revaluation of the renminbi would not have a particularly beneficial effect on the economic recoveries of the US, Japan or Europe, a stance Goldman Sachs supports.

In other words, if the renminbi were raised under the wrong conditions, it would not benefit anyone, while China would suffer huge shocks in various sectors.

Positive effects include the fact that consumer goods and production materials produced in other countries would get much cheaper when measured against the renminbi.

Renminbi appreciation would also attract more foreign investment, reduce the costs of international loans and encourage manufacturing facilities to move into inland areas where labor costs are much lower.

But revaluing renminbi hastily or dramatically would have negative effects on the Chinese economy that must not be overlooked.

First, the manufacturing sector could suffer remarkable damage. China's competitive advantage in the manufacturing sector is in its low labor costs.

Exports would suffer from a rapid rise, and in the agricultural industry, cheaper imports would take an upper hand over domestic crops, with relatively reduced prices.

The direct consequence would be a large-scale migration of farmers, especially those in eastern areas, into the cities and towns.

The service sector might also be influenced. Once the value of the currency rises, the financial market will become attractive to short-term cash. Given the country's current ability to control financial risks, swathes of hot cash would probably trigger a financial and economic crisis.

Residents could find their money has greater purchasing power after appreciation. But when the negative influence on exports, international balance and economic growth fully emerge, employment prospects and incomes of residents will be damaged, ruining quality of life and standards of living.

Employment would be put under far more pressure once the currency is revalued. The major providers of new jobs are export-oriented and foreign-invested companies. With post-appreciation exports suppressed, employment opportunities would be reduced, adding extra pressure to the already somber employment situation here.

Still in an early stage of industrialization, China is far from being the world's workshop. Its competitive advantage lies in its low labor costs, not products and businesses of core competency.

The economy has to be developed further, more jobs must be created and the pressure concomitant to deflation has to be eased.

In light of China's entire current situation, the time is far from ripe for renminbi revaluation.

There are advantages and disadvantages, but the former are outweighed by the latter.

Since academics have not reached a consensus about the factors and their roles in deciding the exchange rate, we should use two main criteria when judging a currency's exchange rate: Whether the economy is advancing smoothly at the current exchange rate level, and whether economic progress is sustainable under the exchange rate arrangement.

If the answers are both positive, the exchange rate arrangement should not be dramatically changed. In other words, if it ain't broke, don't fix it.

And this is today's case in China.

(China Daily September 3, 2004)