Sir, Your editorial on unwinding US-China trade imbalances (April 7) sets out well the reasons for the US's frustration with China's exchange rate policy.

Resident Fellow Desmond Lachman

However, it overstates its case by focusing on China's bilateral exchange rate with the US rather than on China's effective exchange rate. The latter measure is very much more relevant than China's bilateral rate in assessing China's contribution to today's large global payment imbalances.

Since July 2005, when China revalued its currency by 2.1 per cent with respect to the US dollar, there has been a significant appreciation of the dollar with respect to the euro and to the Japanese yen. Being tied to the US dollar, the renminbi has also appreciated against those currencies over this period. As a result, over the course of 2005, on an effective basis the renminbi appreciated by 9 per cent.

In his forthcoming talks with President Hu Jintao of China, President George W. Bush would do well to welcome the 9 per cent effective appreciation of the Chinese currency over the past year. At the same time, he should emphasise the need for a continuation of that pace of effective appreciation in 2005.

He should do so even though this might be more challenging for China in the likely event that the dollar begins depreciating once the Fed stops hiking interest rates.

Desmond Lachman is a resident fellow at AEI.