RENMINBI CONTROVERSIES economy that manipulates its currency). On September 23, 2005 Under Secretary of the U. S. Treasury, Tim Adams(2005), urged the imf to be more ambitious in its exchange rate surveillance. On (The United States Trade Enhancement Act of 2006")that, amie March 28, 2006, Senators Grassley and Baucus introduced legislat economy status under U.S. antidumping laws s Ob y countries with other provisions, would disallow nonmarket econo harmful, fundamentally misaligned currencies achieving market Over half of Chinas exports go to the United States, the European Union, and Japan (with over 30 percent going to the United States alone). If China's rapidly rising current account surplus, huge accu- mulation of reserves, and limited appreciation of the RMB persuade gislators and policymakers in the major industrial countries that China is blocking effective balance-of-payments adjustment and run- ning afoul of IMF exchange-rate manipulation guidelines, China may well find its access to these markets constrained by new protectionist barriers. That could put a serious dent in Chinas exports as well as damage the global economy. Indeed, the protectionist dent could well be larger than the dent associated with a 20 percent revaluation of the RMB. Put in other words, in thinking about the export and growth effects of an RMB revaluation, one should compare those with a reasonable counterfactuak--and not to indefinite continuation of the present exchange rate policy and of present market access Just as the adverse growth effects of an RMB revaluation have beer overstated, so too have the positive effects that a highly undervalued and quasi-fixed exchange rate are said to generate for Chinas domes tic financial stabilit It is widely agreed that China needs to improve the functioning of banking system if it is to increase the efficiency with which capital is used in the economy(see Lardy 1998). A necessary element in any meaningful banking reform is better credit decisions based on an In the Nowember 2005"Report to Congress on International Economic and Exchange Rate Policies, "the U.S. Treasury (2005b)failed to name China as a"currency manipulator Nevertheless, that report noted that the actual operation of Chinas post currency regime was"highly constricted"and that"future reports will intensely scrutinize whether and to what degree China is practicing what officials have previously committed ndertake. "That report also went on to indicate that Chinese President Hu told President Bush in October 2005 that China would unswervingly press ahead with reform of its cchange rate mechanism and that "the Chinese authorities should do so by the time this The grassely-Baucus legislation would IMF from voting for a quota increase fo uly coun t the u.s. executive director at the ntry found to have a fundamentally aligned currency that adversely affected the U.S. economy.economy that manipulates its currency).” 14 On September 23, 2005, Under Secretary of the U.S. Treasury, Tim Adams (2005), urged the IMF to be more ambitious in its exchange rate surveillance. On March 28, 2006, Senators Grassley and Baucus introduced legislation (“The United States Trade Enhancement Act of 2006”) that, among other provisions, would disallow nonmarket economy countries with harmful, fundamentally misaligned currencies from achieving market economy status under U.S. antidumping laws.15 Over half of China’s exports go to the United States, the European Union, and Japan (with over 30 percent going to the United States alone). If China’s rapidly rising current account surplus, huge accu￾mulation of reserves, and limited appreciation of the RMB persuade legislators and policymakers in the major industrial countries that China is blocking effective balance-of-payments adjustment and run￾ning afoul of IMF exchange-rate manipulation guidelines, China may well find its access to these markets constrained by new protectionist barriers. That could put a serious dent in China’s exports as well as damage the global economy. Indeed, the protectionist dent could well be larger than the dent associated with a 20 percent revaluation of the RMB. Put in other words, in thinking about the export and growth effects of an RMB revaluation, one should compare those with a reasonable counterfactual—and not to indefinite continuation of the present exchange rate policy and of present market access. Just as the adverse growth effects of an RMB revaluation have been overstated, so too have the positive effects that a highly undervalued and quasi-fixed exchange rate are said to generate for China’s domes￾tic financial stability. It is widely agreed that China needs to improve the functioning of its banking system if it is to increase the efficiency with which capital is used in the economy (see Lardy 1998). A necessary element in any meaningful banking reform is better credit decisions based on an 14In the November 2005 “Report to Congress on International Economic and Exchange Rate Policies,” the U.S. Treasury (2005b) failed to name China as a “currency manipulator.” Nevertheless, that report noted that the actual operation of China’s post July 21, 2005, currency regime was “highly constricted ” and that “future reports will intensely scrutinize whether and to what degree China is practicing what officials have previously committed to undertake.” That report also went on to indicate that Chinese President Hu told President Bush in October 2005 that China would unswervingly press ahead with reform of its exchange rate mechanism and that “the Chinese authorities should do so by the time this report is next issued.” 15The Grassely–Baucus legislation would also prevent the U.S. Executive Director at the IMF from voting for a quota increase for any country found to have a fundamentally misaligned currency that adversely affected the U.S. economy. 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