China's foreign exchange reserves recently topped one trillion U.S. dollars, renewing concerns that Beijing keeps its currency, the yuan, artificially low, which could disrupt the global financial order.

Many China experts note that perhaps the most important economic news from Beijing came last month when China's foreign exchange reserves surpassed one trillion dollars. That's the largest holding of foreign exchange reserves by any single country in the world and exceeds the gross domestic product of most nations. China's accumulated wealth is chiefly a result of its trade surplus.

World Economic Balance

But not everyone is celebrating. Many Western economists and policy makers are concerned that global trade imbalances could upset the world economy. They say that China's low currency keeps its exports cheap and makes it hard for the U.S and other nations to export goods and reduce their trade deficits. China's biggest trade surplus -- about $ 200 billion -- is with the United States. America, meanwhile, has the largest trade deficit of any country in history -- estimated at more than $700 billion this year.

Some critics in Washington argue that China's increasing reserves are proof that Beijing is keeping its currency undervalued for an unfair trade advantage.

Under pressure from the U.S., China allowed its currency to rise only about 3 percent since July of 2005. But most economists don't expect further increases in the exchange rate in the near-term.

International economist Peter Bottelier at The Johns Hopkins University in Washington says Beijing fears that China's economy still largely depends on foreign investment and that a strong yuan could hinder economic growth. He says China will re-value its currency only after its economy becomes fully self-sustaining.

"They still have a lot of poverty. Most of that poverty is in agriculture and if you make foreign grain suddenly much cheaper than domestic grain, it would further aggravate the problem in precisely the most vulnerable parts of China's society," says Bottelier. "Another argument is that a large part of their export industry is low-end manufacturing, which might be knocked out if you suddenly adjust the valuation of currencies. A third consideration is they have so many assets in dollars. If you revalue the local currency against the dollar, then the value of all those reserves goes down."

Strength of the Yuan

Former World Bank expert Peter Bottelier says a stronger yuan could also upset many foreign investors in China, including some leading American corporations.

"The U.S. has interests on both sides of the argument. Most U.S. companies operating in China and exporting from China, like G.E. [General Electric], Motorola and others have no interest in a more expensive Chinese currency. It's the importers in the U.S. and the manufacturing sector in the U.S. that still compete with imports from China that want a more expensive Chinese currency. But that's only about half the story," says Bottelier.

Many economists point out that Asian countries account for about half of the world's trade surpluses. Experts argue that any currency adjustments would have to be measured, managed and global.

Clyde Prestowitz is President of the Washington-based Economic Strategy Institute and served as trade negotiator during the Reagan administration.

"It's not just China. Japan has a trillion dollars of reserves. Even small countries like Singapore have $200 - $300 billion, Hong Kong $150 - $200 billion. This is a global phenomenon. All the Asian currencies -- the Japanese, the Koreans, the Taiwanese, the Singaporese -- all of these countries intervene in the currency markets to undervalue their own currencies in order to maintain their trade surpluses," says Prestowitz.

Credit Relations

Most experts note that the U.S. and its foreign creditors are co-dependant. The United States consumes more than it produces, so it borrows the difference from abroad. Foreign countries are willing to lend, by buying U.S. Treasury securities, so that their factories stay busy with American orders.

But veteran trade negotiator Clyde Prestowitz says that countries like China, which have heavily invested their reserves in U.S. financial instruments, are concerned that America might eventually be unable to meet its financial obligations.

"Historically, when countries accumulate very large debt they tend to default or they tend to print money and inflate the debt away. And that's increasingly the question that people are asking because the United States is adding international debt at the rate of nearly a trillion dollars a year. And the fact that these questions are being raised already tells you that there is some uncertainty about the long-term prospects of the dollar. The dollar is not as good as gold," says Prestowitz.

But Stanford University economist Ronald McKinnon contends that the U.S. dollar retains a special role in the world economy, which protects it from a sudden collapse.

"The dollar is sort of international money for a variety of purposes. Most trade in Asia is invoiced in dollars. Banks, when they make payments, from one currency to another will use the dollar as intermediary currency. And governments want dollars as the official exchange reserves, with which they intervene against the dollar to stabilize their exchange rates," says McKinnon. "This very central role of the dollar makes the world's money machine much more efficient. But the down side is that it tends to give the U.S. an almost unlimited line of credit with the rest of the world because it alone can borrow in its own currency."

As a result, Professor McKinnon says Americans have never been more in debt, while their Chinese counterparts have never saved so much. He agrees with other analysts who argue that one way to correct the situation is for the U.S. to consume less and for China to spend more.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.