The first round of Yuan revaluation won t be over until the currency is up against the dollar by at least 10 , and probably more. China s first currency move was brilliant only if it is not the last.

Under these circumstances, revaluation of the exchange rate will not have a severe impact on an economy s development. For example, Japanese economists argue that the Plaza Agreement, which called for orderly appreciation of non dollar currencies against the dollar, was a natural outgrowth of high national income.

Pressure for revaluation stems, therefore, not from the real needs of China economy, but from large imbalances in the United States, particularly its long standing trade deficit, which exceeds 5 of GDP. However, dollar supremacy means that the US can sustain a much wider balance of payments deficit than other countries.

But China s current situation is vastly different. Pressure for revaluation comes at a stage when per capita national income is merely 1,000, not 10,000 or 15,000, so China still needs a rather long period of rapid economic growth to reach anything like the stage that Japan had achieved when it allowed the yen to be revalued.

China s abrupt decision to raise the value of the renminbi (yuan) by 2.1 and to end its peg to the dollar comes after months of pressure from the US. But the revaluation is likely to be a one time affair and the free floating of the renminbi is probably not real because a stable currency is very much in China s interest.