Reforming China’s exchange rate policy is an important goal, and U.S. officials should urge the Chinese to move to a fully convertible currency as quickly as possible. It is important to note, however, that Chinese currency reform will not eliminate the U.S. trade deficit.

• “[T]he trade deficit with China accounted for 21.5 percent of the sum of total U.S. bilateral trade deficits in 2003,” according to the Congressional Research Service. The United States has a trade deficit because we invest more than we save and therefore must import to make up the difference. Reforming China’s exchange rate policy will not end the trade deficit.
• Overall, China’s global trade is in balance. While China has a large trade surplus with the United States, it has a significant trade deficit with the rest of the world.
• The United States should work with China to reform its monetary policies through comprehensive capacity-building measures that aim to ensure a stable Chinese economy and expand opportunities for U.S. businesses..

Premature reform of China’s exchange rate policy could spark an economic crisis in China that would be harmful to U.S. interests and the global economy.

• Abrupt reform of Chinese exchange rate policy could cause the fragile Chinese financial system to collapse, which would cause a significant contraction in the world economy and possible political instability in China. Neither result is in the interests of the United States.
• The Chinese economy already is vulnerable due to ongoing economic reforms. China’s banking system is ill equipped to deal with the pres-sures of monetary speculation that result from revaluation. These are the very problems that sparked the Asian financial crisis of the late 1990s.
• More than one-half of Chinese exports are from foreign-invested enter-prises, including many major U.S. companies. Forced revaluation could hurt U.S. companies producing for export in China, which could have a negative impact on the U.S. economy.