Policy Is Key To

has decided to let its currency start rising again.

Domestically, a renminbi will aid in inflation and slow the excessive growth that is fueling it. , its currency will start slowing China's current account surplus and thus the pressures that are building in the rest of the world to counter China's currency undervaluation by limiting exports.

Chinas currency, the is now undervalued by about 25% and by about 40% against the U.S. dollar. , purchases about $1 billion in the currency markets, holding down the price of the and thus giving China a strong competitive position for trade. Furthermore, China's neighbors -- Hong Kong, Malaysia, Singapore, and Taiwan -- similarly side with China to remain competitive with China and thus undervalue their currencies against the dollar and other currencies. This kind of currency manipulation subsidizes all Chinese exports indirectly by 25%-40%.

Because of this manipulation of the currency, China's global current account surplus to about $400 billion and pushed its past the 11% mark in 2007.

During the , this surplus declined as weakened, but it remained above 5% GDP during 2009. According to the , it calculates that the surplus is again and will hit record levels by 2014.

In a world where low GDP growth and record levels of unemployment are likely to stay for the medium term, China is influencing to a lot of affected countries the world over.

If, for example China would miraculously its currency to actual market value and lower its global surplus to 3 to 4 percent of its , the immediate effect to the US would be its global current account would cut dramatically from a deficit of $100 billion to $150 billion.

Correcting the misaligned Asian currencies is by far the most important part of U.S. President new National Export Initiative. The cost to implement it is virtually zero, making it by far the most logical and effective step to reduce the jobless rates and help speed economic recovery.

Historically, this exchange-rate realignment is not new. In 2005, China announced a new "market-oriented" exchange-rate policy and let its currency appreciate 20%-25%. However, in 2008, China revalued to the dollar, and the renminbi has taken it down, taking back about half the previous rise.

Since 2005, China has been more proactive in controlling its currency value, spending from $30 billion to $40 billion a month to prevent the renminbi from climbing quickly.

by: Huey Harden

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