To avoid this, China's government has been trying to reduce pressure from the reserve build should be accompanied by a move towards greater flexibility of the currencysrsiein ogo up, but without touching the yuan. It has slightly relaxed restrictions on residents' purchases of foreign currency: allowed firms to keep a bigger share of their foreign-exchange earnings; and announced plans to allow some Chinese firms to buy foreign bonds and stocks from later this year. These tentative steps towards a more open financial system are worth taking. But they This need not mean an immediate floating of the yuan the currency could float freely only if capital controls were substantially lifted. Given the parlous state of China's banks, such a big bang would be far too risky a main lesson of the asian crisis, after all, was that financia opening needs to be handled carefully Nor does re-pegging the yuan at a higher fixed rate seem a sensible option For a start, nobod really knows how much the yuan should rise if at all. Besides, a new peg would do nothing to prepare the exchange-rate regime for dealing with future economic shocks The best thing China can do-both for its own economy and to help global economic adjustment-is to tie the yuan to a broader basket of currencies, including the euro, and widen he band within which it can move. Increasing the wiggle room would allow the yuan to appreciate, making the global adjustment a bit easier. And by broadening the basket currencies, China would ensure that it did not simply follow the dollar when, as this survey predicts, the greenback heads down further. Drag the others along If China were to move to a more flexible currency regime, the chances are that other emerging economies in Asia too would let their currencies move within wider margins. These countries do not face the risk of sudden capital flight or financial-sector collapse. Unlike China, they have China is impossible. China is not just perceived as a competitive threat by many Asian out relatively sophisticated financial systems and freer capital flows, which suggests that they ar better placed to cope with stronger currencies. Politically however, any movement witl economies; it is also their biggest export market In sum, the safest outcome in the next couple of years for emerging Asia, as well as for the global economy, is not a huge jump in exchange rates but a gradual strengthening. The world economy will still be relying on Messrs Fukui, Zhou, Yam, Fai-nan and Seung to buy dollar assets, but not quite so many of them. If, on the other hand, China's leadership does nothing about the yuan, protectionist pressures may become irresistible particularly in America. That would be a disastrous outcome for China as much as for everyone else Copyright c 2004 The Economist Newspaper and The Economist Group. All rights reservedTo avoid this, China's government has been trying to reduce pressure from the reserve build￾up, but without touching the yuan. It has slightly relaxed restrictions on residents' purchases of foreign currency; allowed firms to keep a bigger share of their foreign-exchange earnings; and announced plans to allow some Chinese firms to buy foreign bonds and stocks from later this year. These tentative steps towards a more open financial system are worth taking. But they should be accompanied by a move towards greater flexibility of the currency system. This need not mean an immediate floating of the yuan. The currency could float freely only if capital controls were substantially lifted. Given the parlous state of China's banks, such a big bang would be far too risky. A main lesson of the Asian crisis, after all, was that financial opening needs to be handled carefully. Nor does re-pegging the yuan at a higher fixed rate seem a sensible option. For a start, nobody really knows how much the yuan should rise, if at all. Besides, a new peg would do nothing to prepare the exchange-rate regime for dealing with future economic shocks. The best thing China can do—both for its own economy, and to help global economic adjustment—is to tie the yuan to a broader basket of currencies, including the euro, and widen the band within which it can move. Increasing the wiggle room would allow the yuan to appreciate, making the global adjustment a bit easier. And by broadening the basket of currencies, China would ensure that it did not simply follow the dollar when, as this survey predicts, the greenback heads down further. Drag the others along If China were to move to a more flexible currency regime, the chances are that other emerging economies in Asia too would let their currencies move within wider margins. These countries do not face the risk of sudden capital flight or financial-sector collapse. Unlike China, they have relatively sophisticated financial systems and freer capital flows, which suggests that they are better placed to cope with stronger currencies. Politically, however, any movement without China is impossible. China is not just perceived as a competitive threat by many Asian economies; it is also their biggest export market. In sum, the safest outcome in the next couple of years for emerging Asia, as well as for the global economy, is not a huge jump in exchange rates, but a gradual strengthening. The world economy will still be relying on Messrs Fukui, Zhou, Yam, Fai-nan and Seung to buy dollar assets, but not quite so many of them. If, on the other hand, China's leadership does nothing about the yuan, protectionist pressures may become irresistible, particularly in America. That would be a disastrous outcome, for China as much as for everyone else. Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved