Sir, Steve Xu correctly notes the ever-increasing signs of overheating in China and he rightly calls for an early tightening in macroeconomic policy to minimise the risk of a hard landing ("Tax cuts will steady China's growth", April 2).

However, his call for a tax cut in the absence of a change in China's currency peg or of an increase in interest rates would appear to be irresponsible. For no matter how beneficial tax cuts might be from a longer-run supply side perspective, at this stage of the cycle they would only add fuel to China's present problem of excess demand.

The more appropriate policy response to China's overheating would be an early tightening in its monetary conditions. Given China's "hot money" problem, such a tightening would necessarily require an early modification of its dollar peg in order to restore interest rate policy flexibility to the Central Bank. The movement away from the dollar peg would also put an end to the renminbi floating down with the dollar, which has resulted in the further undervaluation of the currency and encouraged excessive capital inflows.

The sooner China moves away from its dollar peg, the greater will be its chances of avoiding yet another hard landing that would now be particularly damaging to China's fragile banking system.

Desmond Lachman is a resident fellow at the American Enterprise Institute.