The RMB exchange rate is, as usual, once again at the forefront of China-US relations.

The exchange rate represents the "value" standard of a currency on global financial markets. Economic conditions and where a country stands in terms of international competitiveness stand behind it. This "value" standard is a product of competition between State policy and market rules, and bears great significance for a country's economic development in light of economic globalization.

The revaluation of a currency is a symbol of a sound economy and stronger competitiveness. Meanwhile, revaluing a nation's currency can lead to a dramatic reshuffling of interests on all sides, which means it must be done with extreme prudence.

Indeed, currency revaluation can be unfavorable to exports, especially within labor-intensive industries. Such an action can also be disadvantageous when it comes to attracting foreign funds. Foreign exchange reserves can become devalued, employment pressures may mount, bad assets at banks can become worse and economic growth can slow down. On the other hand, a revalued currency can help the country import and invest overseas, is favorable for paying foreign debt, eases inflation, and improves residents' international purchasing capacity and facilitates their international activities.

A typical example of exchange rate adjustment was in Japan. Since December 1971, its fixed exchange rate against one US dollar rose from 360 to 308 yen. From February 1973 to September 1985, its floating exchange rate rose to 240-250 yen. From the 1985 Plaza Agreement up till now, it has soared to 90-140 yen. From 1971 to 1985, the negative impact of the yen revaluation was not obvious. However, since 1985, a "ten-year stagnation" of the Japanese economy has occurred.

For China, a yuan revaluation is largely hindered by the fact that the free convertibility of the RMB has not yet been realized. The domestic financial system still must be improved to adapt to international practices and Chinese enterprises remain weak in core-technology competitiveness with a rather high degree of labor intensiveness. On the other hand, China has been increasingly dependant on the outside world for energy and raw materials, with a stronger need for investing overseas for some companies. These factors are calling for a more valuable yuan.

First, the RMB exchange rate is not a question of choice between good and evil, but one of weighing advantages and disadvantages. Second, the exchange rate is to a large extent a "technical" question that can be handled through interest rate adjustments and national financial policies. The general principle is to avoid major fluctuations and loss of control. In addition, timing is also crucially important. It is by no means a good thing to change the yuan when international money is flooding in.

Not long ago, the large-margin of devaluation of the US dollar against the euro gave rise to the "dollar scheme" theory in Europe, which deemed the devaluation an act of "repudiation of debts." A much less valuable US dollar will deal a heavy blow to Japan and China as big forex holders.

So, it is highly risky to peg the yuan only to the US dollar or to hold a large number of dollars.

According to former Federal Reserve Chairman Paul Volcker, if the US dollar continues to devalue, the possibility for a currency crisis to break out in the United States within the next five years would be as high as 75 percent. China must be prepared for that eventuality.

The exchange rate is a double-edged sword for a country, as well as for related countries or even the whole world. Therefore, when it comes to the China-US game over what to do with the RMB exchange rate, both sides have cards to play and both will try hard to avoid a life-and-death struggle.

This article is written by Huang Qing, senior editor of the People's Daily, and is translated by People's Daily Online