There would seem to be at least three reasons to take issue with Martin Wolf's assertion that China will do what it considers to be in its own long-term economic interest as opposed to what might be in the short-term political interest of its ruling elite ("How China has managed to keep the renminbi pinned down", October 11).

Resident Fellow Desmond Lachman

First, without a greater degree of Chinese currency movement, together with measures to encourage domestic consumption, China will continue to run unacceptably large external current account surpluses. This will almost certainly invite highly damaging protectionist pressures against China in both Europe and the US, especially in the event of a global economic downturn.

Second, in the absence of greater currency flexibility, the scope of China's central bank to use interest rate policy to regulate the economy will continue to be highly limited by the unwanted capital inflows that higher domestic interest rates would otherwise attract. This will make it difficult for China to avoid the type of overinvestment cycles and speculative excesses that it is presently experiencing, which in the end will further weaken China's already rickety banking sector.

Third, China's de facto pegging of its exchange rate currently requires that the Chinese central bank engage in costly foreign exchange intervention to the tune of a staggering $250bn a year. The dollars that the central bank buys at an overvalued dollar rate for this purpose could end up costing China as much as 2 percentage points of gross domestic product each year.

In sum, China's stubborn resistance to currency appreciation might have more to do with its political elite's desire not to rock the boat and to remain in power rather than with a rational weighing of the country's real long-term economic interests.

Desmond Lachman is a resident fellow at AEI.