McKinnon indicated that recently China's trade surplus is constantly and habitually misunderstood as an exchange rate issue.

Nonetheless, the fact is that compared to investment, the savings rate of China is quite high while that of the US is quite low.

Therefore, the US is short of savings. Should US people have the same savings rate as Chinese people, their nation would likely maintain the interest rates at a low level.

As to how to solve this problem, Prof. McKinnon contended that China should reduce its savings and expand consumption.

At the same time, the US should raise its savings and cut down fiscal expenditure. In this way, the trade imbalance between these two countries can be solved. China's trade surplus will accordingly decline while trade deficit of the US will decrease.

McKinnon does not stand for stimulating trade balance by means of adjusting the RMB exchange rate on a large scale. He said that attempts to solve the problem through the exchange rate will have uncertain impacts.

He added that should the RMB appreciate, we cannot know whether China's trade surplus would decrease. However, China would undoubtedly see comparative deflation, with its interest rates being forced to fall towards zero.

Zero interest rate will probably lead to an inflationary trap, which Japan suffered from two decades ago. If China risks allowing a violent RMB appreciation, its economy will undergo the consequence of turbulence, which, in turn, will affect the economic stabilization of the US and the world.

Yuan to stand above 8 break point again

Chinese currency stood strong again on Wednesday as the exchange rate of the yuan to the dollar closed at 7.9996:1 in the competitive price deal, climbing to break the "8" psychological point one month after it fell below that point.

At 9:30 Wednesday, the board at the National Foreign Exchange Center showed that the average exchange rate of the dollar to the yuan was 1: 8.0051, dropping 22 points from Tuesday. After the opening session, the yuan kept rising steadily.

In the competitive price deal system, the exchange rate of the yuan to the dollar fluctuated between 7.9995-8.0050:1, while in the enquiry price deal system, the transaction of the yuan against the dollar was between 8-8.0054:1.

Analysts say that the appreciation of the Renminbi shows the central bank's strong intention for a tightened monetary policy. In addition, China faces much more pressure with its huge, ever-increasing foreign exchange reserves and such pressure will have to be relieved by raising the yuan value.

At present, China has 900 billion US dollars of foreign exchange reserves, ranking first in the world, mostly coming from the country's trade surplus, which has been growing steadily. Some financial experts predict that China's trade surplus this year will exceed 100 billion US dollars, which means that such pressure will continue to be felt.

It is obvious that the Renminbi's appreciation this time reflects more about its real situation. A staff member at the transaction center predicted that after rising above the "8" breaking point again this time, it is less likely for the yuan to go down much deeper in the future.