In reminding us that the Chinese currency has appreciated by only 5-and-one-half percent against the US dollar since its peg was loosened in July 2005, Lex (December 16) understates the degree to which China continues to manipulate its currency for competitive advantage. For such a comparison overlooks the fact that over this period the dollar has depreciated by a similar amount against the world's major currencies.

Resident Fellow Desmond Lachman

In gauging China's contribution to today's global payment imbalances, it is more meaningful to focus on a measure of China's trade-weighted exchange rate rather than on its bilateral exchange rate with the US. Such an approach reveals that China's real effective exchange rate today is practically at the same level as it was immediately prior to July 2005. This is the case despite the fact that China's external current account surplus has now ballooned to around 9 percent of its gross domestic product and shows every sign of widening further in 2007.

It is little wonder then that Ben Bernanke, the Fed chairman, found it difficult to contain himself in Beijing last week when he branded China's currency as an "effective subsidy" for exporters that was distorting its trade patterns.

Desmond Lachman is a resident scholar at AEI.