IN 2005 two American senators introduced a bill into Congress that threatened to slap a tariff of 27.5% on all Chinese imports unless the yuan was revalued by the same amount (their estimate of how much the currency was undervalued). That legislation was dropped, but several other China-bashing bills are still working their way through Congress and accusations about “unfair” Chinese competition will surely play a big role in this year's presidential election. Many American politicians and economists talk as if the
yuan was still fixed against the dollar. Yet on current trends, by the time the next president enters the White House the yuan could be within spitting distance of the magic figure demanded in 2005.

It may appear as if Beijing has caved in to Washington's demands. But the main reason why China is allowing the yuan to rise faster is because its policymakers believe the benefits to China from a rising currency now outweigh the costs. Beijing's top concern today is inflation, which rose to 6.9% in November. On January 9th the government announced tighter price controls on a range of products. The People's Bank of China (PBOC) increased interest rates six times in 2007, but this is unlikely to squeeze inflation, which has been driven largely by a jump in food prices caused by supply-side shocks. A faster pace of currency appreciation offers a more powerful weapon: it will help to reduce imported inflation, especially of food and raw materials. By reducing the need to intervene to hold down the currency, it will also curb the build-up of foreign-exchange reserves and hence monetary growth.

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The Chinese government controls the value of the yuan. If the chinese government chooses to retard the value, it unfairly gives China an advantage for supplying exports. This could slow down inflation in China and feul their growth while other countries currencies are not controlled completly by the government. Because of this, some US legislators proposed a bill to tax Chinese imports to the US 27.5% in order to level the currency differences. The bill wasn't passed, however, Chinese officials inflated the value of the yuan.