Sir, Stephen Roach ("How the Fed is doing China a favor", April 22) does us a service by reminding us of how the prolonged maintenance of unusually low US interest rates has contributed to today's global economic imbalances. He correctly emphasizes how these low rates have played a key role in the rise in Chinese investment to an alarming and unsustainable 50 per cent of gross domestic product. In the light of China's increased importance to the world economy, the eventual unwinding of China's investment bubble is almost certain to have untoward global economic consequences.

Mr. Roach is mistaken, however, if he thinks that a "measured" pace of US interest rate increases will do very much to slow today's strong speculative capital inflows into China. These inflows are being fuelled by the expectation of a significant appreciation of the renminbi, which is only being encouraged by the escalation of US congressional pressure for the early flotation of China's currency. Such capital inflows will persist so long as the market perceives China's currency to be undervalued.

A broader lesson, which Mr. Roach does not draw from China's recent experience, is that it is in China's own macroeconomic policy interest to move towards a very much more flexible exchange rate policy. Only then would China have the monetary policy independence from the US that it sorely needs to help steer the Chinese economy according to the country's own domestic circumstances.

Chinese policymakers must realize that they cannot expect the US Federal Reserve to take China's circumstances into account when setting monetary policy for the US.

Desmond Lachman is a resident fellow at AEI.