Once again, the issue of appreciation in the value of the RMB became a hot topic of conversation at the second meeting of the China-U.S. strategic economic dialogues. When asked whether the value of Yuan will appreciate substantially in the near future, I will answer with clear two points. First, there should be a distinction between the pressure for appreciation and necessity for appreciation. Potential pressure to re-value the Yuan does not mean that there must be a significant increase. Whether the value of the RMB should appreciate depends on the cost or the price. Secondly, in order to decide if RMB should appreciate in value, we also need to take into consideration financial sectors, China's industrialization process and long-term economic growth, and the contribution of China's economic growth to global economic growth.

Considering the characteristic the large population and scarcity of resources in China, and low economic development; China, especially the vast coastal areas, must develop processing trade models based on direct, foreign investment. These are primarily choices of the market and enterprises, not the choice of any government force in advance.

Choosing the model of processing trade at the global level, China is substantially open to the outside world in terms of current dependency on foreign capital and world trade. It has at least three effects on world economic growth. First, China is playing an increasingly important role in global economic growth. Second, China's contribution to the world's economic growth is becoming increasingly larger. Although it's national GDP only accounts for 5% of the world's GDP, when taking into account the indirect association effect, China actually contributes to about 15%-18% of the world's economic growth in general. Third, countries throughout the world share the benefits of China's economic growth.

This growth is manifested externally in the following ways:

First, cheap exported goods produced by global factories create a large consumer surplus in all countries, particularly in developed countries.

Second, China's demand for raw materials and intermediary products during its economic growth boosts the economy of those countries able to produce all these imports.

Third, a substantial absorption of foreign capital stimulates the capital output of developed countries and regions. High-speed expansion of these capital goods is also accompanied by a large amount of capital gain.

Fourth, the wealthy population of China, although small in scale, consists of the major consumers of luxury products produced by developed countries. They spur a growth in production of luxury goods from these countries.

Fifth, official foreign exchange-based foreign investment helps promote the international capital cycle, as well as the active operation of the world's economy.

Therefore, on the occasion that the Chinese economy is becoming the momentum and source of the world's economic growth, a significant RMB appreciation under the pressure of the United States might bring about a tremendous negative impact on China's economy. If China cannot rapidly upgrade its labor-intensive industrial structure based on "OEM International", or enterprises cannot respond by taking rigorous steps toward an industrial upgrade; the country will face a long-term economic recession. Undoubtedly, China will pay a high price for this, and the world will also have to foot the bill.

The RMB exchange rate is not the cause of the US trade deficit. Statistics show that about 85% of the US trade deficits are generated by foreign-funded enterprises in China. China has tried its best to deal with the issue of the RMB appreciation rate. Prior to the second meeting of the China-U.S. strategic economic dialogues, China announced a larger tolerance for intervals of exchange rate fluctuation. Compared with data prior to the reform in July 2005, the RMB has appreciated in value, against the dollar, by more than 8%.

This is a judgment I have made based on the balanced position of the Chinese economy and the world economy. In the face of the enormous increased pressure on foreign exchange reserves and the growing expectation of RMB revaluation; in addition to speeding up the reform on the RMB exchange rate formation mechanism, there are some more important things we need to do. They are as follows:

First, China should make the Yuan substantially more adaptable in the overseas market.

Second, the country should promote the free circulation of the RMB in areas of trade; that is, allowing the Yuan to flow freely not only in the consumers market, but also in the area of manufacturing.

Third, we should encourage Chinese enterprises to invest in overseas industries, especially in overseas mergers and acquisitions of listed companies, brand assets, resource-based industries, and the introduction of various kinds of technical professionals.

Fourth, China should encourage its financial companies to actively invest in the overseas currency, funds, and stock markets.

Fifth, there is the need to enhance the momentum of introducing foreign advanced technology and equipment, improving China's traditional industries through importing advanced technology, and using this technology to create its own, national brands.

Special emphasis should be placed on the second point. The RMB should follow the path of regional expansion, a move that will not change the world currency standard. We can try to neutralize the strong impact of the US dollar, which may strongly impact China's domestic economy by causing inflation, when issuing RMB to overseas market.

By People's Daily Online; The author is principal of School of Economics of Nanjing University