In fact, a sharp appreciation of the yuan, as some U.S. politicians are calling for, may spell trouble for the U.S. and world economies.

The issue could come to a head next week during Chinese President Hu Jintao's visit to the United States. Some U.S. politicians say an undervalued yuan (also known as the renminbi) is the main factor behind the large trade deficit with China.

"It's a fiction to think a 10% revaluation of the yuan would have any measurable impact on U.S.-China trade," said David Gilmore, a partner at Foreign Exchange Analytics.

The lower cost of labor and material in Chinese products compared with American ones means that a 10% revaluation would still leave the balance in favor of Chinese exports.

A faster-than-needed appreciation could cause the prices of many goods made in China to go up, creating inflationary pressures for the U.S. and world economy, while at the same time reducing China's willingness to finance the swelling U.S. deficits, analysts cautioned.

"If they revalue by more than 5 to 7% ... it would be nearly disastrous for the U.S. and world economy," said Ashraf Laidi, chief currency analyst at MG Financial Group.

Token move

Still, most experts are expecting some move in the yuan this month. Laidi is expecting at least a token gesture that could take the form of widening the dollar/yuan band to a range such as 0.6% from its current 0.3%.

Such a pre-emptive measure might ward off criticism from the Bush administration during Hu's trip April 18 to 22 and might help ensure China is not named as a currency manipulator in the Treasury's upcoming report to Congress, said Kathy Lien, chief fundamental analyst at Forex Capital Markets.

China revalued the yuan by 2.1% last July and hypothetically allows the yuan to move as much as 0.3% daily against a basket of currencies. Since the big move in July, the yuan has gained only 1.35% against the dollar, greatly frustrating U.S. politicians who argue the Chinese currency remains undervalued by as much as 40%.

The yuan has risen at an accelerated pace against the dollar recently, amid heightened pressure from the U.S. It posted a new post-revaluation high of 8.0022 on Monday, one step closer to the psychologically key level of 8 yuan per dollar.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said a gradual widening of the hypothetical trading band would be a low-cost compromise for China.

"Remember under Bretton Woods, a 1% band was regarded as fixed. And even that 0.3% band is not being fully explored," Chandler said, referring to policies implemented after World War II to manage the world economy.

Policy "misguided"

The more important question remains of whether a rise of the yuan against the dollar would eliminate the U.S. trade deficit with China. That gap grew 24% in 2005 to $201.6 billion, more than a quarter of the total trade gap, according to government data.

The conventional wisdom is a stronger yuan will encourage Chinese consumers to purchase more American-made goods while at the same time making Chinese goods more expensive to U.S. consumers, therefore narrowing the trade imbalances between the two countries.

"The U.S. policy is misguided by focusing on the renminbi exchange rate," said BBH's Chandler, adding that policy makers should focus on such "bigger and more important issues" as enhancing intellectual property rights and boosting Chinese workers' wages.

Ronald McKinnon, an economics professor at Stanford University, agreed and said U.S. policy is "misplaced."

"Today's American mercantile pressure on China to appreciate the renminbi against the dollar is eerily similar to the American pressure on Japan to appreciate the yen that began over 30 years ago," said McKinnon.

Indeed, succumbing to pressure from the U.S., the yen went all the way down from 360 against the U.S. dollar in August 1971 to touch 80 on the dollar in April 1995.

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