Sebastian Mallaby ["China's (Petty) Fiscal Crimes," op-ed, June 6] is correct that much of U.S. criticism of Chinese economic policies is unreasonable. However, it is not clear that China's exchange rate is "artificially low and its exports artificially competitive."

The fundamental question is what determines the "market value" of a currency. Those who claim that China's currency, the yuan, is undervalued point to China's expanding account surplus as proof, but they ignore the desire of Chinese households to diversify their investments by buying foreign assets. If capital controls were removed, the outflow of funds might drive down the market value of the yuan. No one, therefore, really knows what the proper exchange rate should be.

Nor are Washington's hands clean when it comes to intervention in the currency markets. In recent years the Federal Reserve has held short-term interest rates abnormally low. Because interest rates have a big effect on exchange rates, this is equivalent to the United States artificially depressing the value of its currency. At least some of Beijing's vast dollar purchases should be seen as neutralizing this distortional American behavior.

The bottom line is that the current account deficit of the United States is a result of its exceptionally low savings rate. If this country persists in saving less than it invests, it must continue to import capital from abroad in the form of a current account deficit. Increasing the value of the yuan in these circumstances would only shift the U.S. deficit away from China and toward other countries. This might help industries that compete with Chinese exports, but that is all it would achieve.

Beijing ultimately may decide to raise its exchange rate to slow its own economy, but despite the rhetorical certainty in Washington, this would not necessarily represent progress toward a more market-based trading system.


Senior Fellow

Center for International Studies

Massachusetts Institute of Technology

Cambridge, Mass.