【正文】 rade balance does not seem to be that far out of equilibrium. China’s desire to join the G7 club is likely to result in abandoning its peg, however, despite the increased risk to its economic development. The valuation of the Chinese renminbi (RMB) has drawn lots of attention lately. The IMF, . government, and the G7 finance ministers are urging China to revalue its currency,which is currently pegged at to the arguments for China to appreciate its currency roughly follow these lines: ? China’s currency is grossly undervalued。 Obstfeld and Rogoff, 2020). But is revaluing the RMB part of the solution to this problem? A close look at the situation suggests that at best it may reduce the problem only marginally in the near term, while the longerterm impacts are unclear since foreign exchange policy changes can bring a host of unintended consequences. However, political reality gets in the way: politicians need to show voters and powerful lobbying groups that they are doing something. Exchange rates are a lowhanging fruit for them, even though they are a small fruit and—from the Chinese perspective—an unripe one. The really effective measures, such as addressing domestic demand imbalances and promoting . goods and services exports, are unfortunately political nonstarters in the United States. The perception that undervaluation of the RMB is the cause of . trade deficits has also meant that China’s efforts in adjusting export petitiveness through nonforeign exchange measures have received little attention in the political debate. Looking to the Future The central point of this paper is that while the RMB is clearly undervalued (especially by PPP measures), there really has been no fundamental change in the valuation that warrants intensive market pressure for it to have depreciated in 19978 and to appreciate now. Looking at the broad picture, the relationship between the RMB’s peg to the dollar and China’s external account surpluses and rising foreign reserves is not as clear as often argued. The contribution of the RMB’s undervaluation to external imbalances in both the United States and China is insignificant in parison with other structural factors, such as domestic demand imbalances for G3 and improving the investment environment (for Foreign Direct Investment—FDI) and export petitiveness in China relative to other countries. There are far better ways to address the imbalances with little distraction for China’s challenging domestic reform agenda. In particular, labor costs in China are rising. China’s political capital is best invested in other areas of structural reform. Unfortunately, given its much larger influence on the global economy, China probably cannot say “no” this time to external political pressure and may move sooner than it would like. If history proves that China depegged before it is capable of handling the shock, the lesson would be that the G7 failed to recognize that a stable, orderly progressing China is in the best interest of all. For the longer term, few doubt that China must adopt a more flexible exchange rate regime in this postBreton Woods environment. A flexible RMB will allow China to conduct independent moary policy (with an open capital account) and minimize the impact of fluctuations of major currencies, especially the . dollar’s gyrations against the euro and the yen. China’s outward investment needs are growing rapidly and would benefit from a flexible RMB. But first, China needs to clean up the banking system, adjust capital accounts, and develop healthy and robust domestic financial markets. We can expect that a flexible exchange rate will improve China’s overall financial system. China has so far learned valuable lessons of the perils of opening the market too soon and allowing a currency to appreciate too fast from the experience of Japan and Southeast Asia. Going forward, it needs to study the positive lessons of liberalizing the exchange rates. The successful cases studies of Poland (from the dollar peg in 1990 to free float in 2020) and Chile (from fixed rate in 1981 to plete float in 1999) clearly show that liberalization can be acplished without a major crisis