In recent years, some Ministers of Finance of certain countries pointed out that some Asian nations need to appreciate their currencies. They were mainly referring to RMB. US Secretary of Treasury John W. Snow recently has put pressure on China and asked China to allow free conversion of yuan. The year 2006 is mid-term election year for the United States. US government felt necessary to step up the pressure on China again so that it will fully liberalize the yuan exchange rate.

At present, China faces three options: First, to appreciate the yuan significantly; second, to make it freely convertible; third, to gradually make the RMB appreciate. There are two opposite views about the revaluation of RMB: one is to endorse, and the other is to oppose.

Those who have the first viewpoint think that yuan should appreciate substantially. The International Monetary Fund (IMF) indicated that calculating on the purchasing power parity, one dollar should be converted to 2.2 yuan. Some other companies believe that the appreciation rate of yuan should be 15% to 25%, viz. one dollar equals to five to six yuan. There are also other voices. For instance, an economist of the Asian Development Bank pointed out that RMB should appreciate by a small margin, for example, 7%-10% for each year.

All these debates show that there is not a sound basis for the RMB appreciation. Also there is no evidence which can prove the RMB appreciation would balance the trade. Although China's trade surplus with the US is higher than it was 20 years ago and IMF and US Treasury are both hardliners about this issue, there is no model or analysis that can support their view.

I have been maintaining a consistent stand in the RMB exchange rate issue. Ever since 1994, I have addressed that as long as the US dollars is stable, yuan should maintain stable too. In 1997, the RMB exchange rate reached a balanced level. However, the appreciation of US dollars led to deflation of local currencies in those countries whose were pegged with US dollars. At that time, I suggested that China maintain the fixed exchange rate against the dollar and abandon the devaluation of yuan. If the exchange rate between the yuan and the US dollar vacillates, Chinese investment will encounter destructive aftermath. History has demonstrated that China did nothing wrong in late 1990s, therefore the best strategy for China is to "maintaining the status quo".

Now, the same situation is repeated. There is again the voice calling for free conversion of RMB or an appreciation to avoid inflation, saying that this is conducive to China's interests. IMF also told the same. However, if honestly considering for China's interests, we should let China decide by itself what would really do good to it and what kind of position to take.

People called the 12 principles that I've given in opposing the RMB appreciation the "Mundell principles." The first principle is China absolutely can defer the free conversion. The eighth principle is the RMB appreciation would cause instability in the entire South Asian region. The ninth is the appreciation would undermine the influence of the yuan. The tenth is the appreciation would undermine China's compliance to WTO regulations. The eleventh is the appreciation would worsen the economic connections between China and a number of small neighbors.

These principles have nothing special. I believe 95% economists would agree with them. These are also the reasons why other countries in history have abandoned appreciating their currencies. Even between 1938 and 1955 when the United States experienced a period of currency shortage, it did not appreciate the dollar.

Unless all the other countries report higher inflation rates, both sides will become "losers". I definitely would not recommend doing so.

The third viewpoint is to allow a gradual appreciation of RMB. This is mainly through increasing the wages for the Chinese people thereby promoting employment and improving the living standards of working people. I don't think we should expedite the appreciation of the yuan for the time being, although finally it probably will be resolved through diplomatic channels. I understand China's position and I hope this trend can be maintained.

The author is Robert A. Mundell, Nobel economics laureate and professor of the Department of Economics of University of Columbia.