THE UNITED States and China are at loggerheads on several fronts: China's military buildup, its piracy of intellectual property, its human rights abuses. But one potential flash point has been managed successfully so far, to the credit of the Bush administration. Treasury Secretary John W. Snow has persuaded Congress to shelve bad legislation that would slap tariffs on China to punish it for maintaining an undervalued currency. Meanwhile, Mr. Snow has urged the Chinese to reform their currency policy for their own good. Yesterday China took a first step in that direction, abandoning a decade-old policy of pegging the yuan to the dollar.

China's move is too cautious to do more than dent its trade surplus, much less cure the alarming U.S. trade deficit. The yuan will now be worth 2 percent more, in dollar terms, than before the announcement; the monthly wage of a Chinese factory worker will move from, say, $100 to $102, a trivial difference. Even so, China's announcement is symbolically important. With China having shown itself capable of one currency move, further adjustments now seem more likely. In time, the policy of pegging the currency may give way to a more flexible, market-driven "float." This is the right direction to head in. Allowing the currency to float would strengthen China's ability to manage its own economy, softening the recent pattern of inflationary booms followed by painful slowdowns.

From the global perspective, the stakes are even higher. In the past decade or so, the world has come to rely on the United States to drive economic growth. Both the U.S. government and American consumers have borrowed to spend lavishly, and the spending has stimulated not only the U.S. economy but also export-driven growth elsewhere. Meanwhile, European and Japanese demand for American goods isn't expanding fast because those economies are sluggish. But the real puzzle is beyond Japan, in the rest of Asia. The region grew an astonishing 8 percent last year, a rate that would normally be expected to entail surging demand for imports. But the Asians continued to run a large trade surplus. Their growth was based on sizzling U.S. demand, not on demand from their own consumers.

This is not sustainable. Americans cannot go on borrowing from Asians to buy Asian goods forever. To fix this imbalance, Americans have to sell more goods and Asians have to consume more. Raising the value of Asian currencies is one mechanism to achieve this: It makes American goods more competitive and Asian consumers richer. China's cautious decision yesterday has already been emulated by Malaysia; other Asian countries, which have felt unable to revalue against the dollar for fear that they would lose competitiveness vis-a-vis China, may now reconsider. Whether they do may depend on whether China builds on its move with further revaluations in the next few months. Having taken the first step, China's leaders must have the courage to keep walking.