Chinese officials - under growing international pressure - say they will eventually revalue their currency, the yuan, but in their own time. And many experts support the go-slow approach.
Business people and politicians in the United States, Europe and other countries say China's currency is undervalued, which makes its products unfairly cheap on world markets. To spur Beijing into action, some U.S. lawmakers have proposed additional tariffs on Chinese imports unless the currency is made more flexible.
For the past decade, the yuan, or renminbi, has been pegged at 8.28 to the U.S. dollar. Some economists say it is undervalued by 30 to 40 percent.
But the government in Beijing says it needs more time to improve its fragile financial system. A rushed revaluation could also reduce Chinese exports, which are needed to provide jobs to a growing workforce.
In a recent speech to Asian and European finance ministers, Prime Minister Wen Jiabao said China was committed to what he called a responsive and responsible revaluation.
Mr. Wen said a change in exchange rates will have a far-reaching impact, and China needs time to prepare. He says a careful, gradual approach will contribute to stable development in China, Asia and the wider world.
Behind the scenes, economists, officials and business people on both sides of the debate are pondering just how China might revalue its currency.
At an international meeting in Hong Kong in June, Norman Sorensen, chairman of an American organization [the Coalition of Service Industries] dedicated to reducing barriers to U.S. exports, acknowledged that some past revaluations had caused problems rather than solved them. "Be careful what one wishes for in terms of pushing too hard for a revaluation process that may not have the fundamentals to secure a controlled revaluation," he said.
Masahiro Kawai, economic advisor to the president of the Asian Development Bank, says recent history gives China good reason to move carefully on currency reforms. He points to the Asian financial crisis of the late 1990s, when overvalued Southeast Asian currencies collapsed under pressure from financial speculators - precipitating a severe, prolonged recession in much of the region.
"This Asian financial crisis told us the lesson that a rapid capital account liberalization without adequate preparation would be quite dangerous because capital, a lot of capital, can come into your country in a massive way, and then capital can just leave your country very fast, thus causing a currency crisis. And perhaps that is one reason China is taking a cautious approach," he said.
Robert Lees of BearingPoint, a global business-consulting firm, says his experience in China leads him to the opposite view. He believes the economy is competitive enough to withstand a revaluation. "I suspect China knows that the time is coming and that it's for the good of China, and that China has a responsibility to the world now. It's done a great job in terms of understanding, accepting that responsibility, especially here in the neighborhood in Asia," he said.
Mr. Lees and Mr. Kawai say the trick is whether Beijing can revalue the currency gradually, while protecting it from financial speculators and major fluctuations in the global market. "I think the views are converging, in the sense that very rapid revaluation, very sharp revaluation, would not be a good idea for China, but rather to revalue the currency on a step-by-step basis, little by little,"Mr. Kawai said.
Mr. Kawai says China's economy could absorb a 20 percent appreciation in the currency over the next four to five years.
He said the changes will take a long time to manage, although small steps can begin immediately. "It's going to take another 10 years or so. So we are not really talking about full flexible, full-fledged exchange rate regime. But this kind of an exchange rate change, which is of a limited nature, can be adopted even from today," he said.
Mr. Lees says a controlled revaluation can force the Chinese economy to become more stable and efficient. But he notes the process faces a major hurdle - a fragile banking system. "China's banking system has been its real Achilles' heel over the last several years, primarily due to loans, huge loans, that were made without proper credit risk management procedures and transparency in effect," he said.
Mr. Lees says China's banks are rapidly improving. And the country's economic leaders say they are investigating how to proceed with a controlled revaluation.
The central bank says it is researching the possibility of pegging the yuan to a basket of major foreign currencies, to buffer against any volatility in the dollar.
Tensions over the currency issue persist between Beijing and Washington. While some may be unhappy with the pace of China's currency reforms, Mr. Kawai and others say a gradual revaluation could improve relations with China's key trading partners. And they say if the process is carried out with care, China's economy will grow much stronger.