We raised the reward. We continued to increase the reward.

Third, the rate of currency appreciation has edged up.

Upping the ante could turn the tables.

China interprets quantitative easing as a plot to devalue the dollar and force a revaluation of the renminbi.

For 2013, the prize amount has been increased to 1 million.

The effect will be much the same as a currency appreciation.

Revaluation would accelerate this trend.

Revaluation of the Chinese yuan would also help.

It stimulates production (and hence employment), unlike overvaluation, which stimulates consumption.

While hardly denting global trade imbalances, a small move would bring in a flood of foreign capital, overwhelming China s currency defenses and leading to chaos.

An independent monetary policy requires a flexible exchange rate, not a revaluation.

Pressure on China today to push up the value of the yuan against the dollar is eerily similar to the pressure on Japan 30 years ago to make the yen appreciate.

Some resist appreciation actively and openly others do so in a less visible manner.

In the absence of a generalized appreciation of all Asian currencies and unchanged American policies, possibly only a deep recession could reduce the overall US current account deficit.

In this conflict, both sides have raised their bets, and their threats could become a reality.

The result will be to raise the prices of China s exports and fuel demand for imports. The effect will be much the same as a currency appreciation.

CAMBRIDGE For several years, American officials have pressed China to revalue its currency.

Delay has made current account rebalancing via RMB appreciation costly.

In that case, a large RMB appreciation undertaken now would be overkill.

High world oil prices and capital inflows are strengthening the balance of payments and contributing to exchange rate appreciation.

For two decades, expectations that an appreciating yen would restore external balance were repeatedly disappointed. At the time of the December 1971 Smithsonian Agreement, 308 yen to the dollar was supposed to do the trick.

It will be prolonged and occasionally very tense, but eventually result in appreciation of the renminbi.

But would a revaluation of the renminbi solve America s problems? Recent evidence suggests that it would not.

In a liberalized capital market, the undiminished risk that the yuan might appreciate means that investors must be compensated by a higher interest rate on dollar assets.

But what would an appreciation of the renminbi do to China s inward and outward foreign direct investment (FDI)?

Meanwhile, China is intervening massively to resist appreciation of the renminbi and thus maintain its export performance.

These are hardly trivial amounts, and more renminbi appreciation can be expected in the years to come.

Thus, China bashing primarily means pressure to revalue the yuan. However, this demand is as unwarranted now as was pressure on Japan to make the yen appreciate.

And the only way for the trade deficit to shrink substantially is for net imports to fall, which requires either a relatively sharp decline in the value of the dollar, thereby raising import prices, or a depression in the US.

The first round of Yuan revaluation won t be over until the currency is up against the dollar by at least 10 , and probably more.

If actual appreciation does not reduce China s trade surplus, pressure to appreciate the yuan further would only continue, as was true for Japan before 1995.

Only China is in a position to initiate a process of international cooperation, because it can offer the enticement of renminbi appreciation.

But it is clear that the fall of the renminbi against other currencies that has resulted from the Fed s policy of quantitative easing now gives the Chinese scope for more rapid appreciation of the renminbi relative to the dollar.

Experts estimate that, in terms of guarding against inflation, the euro s appreciation has been equivalent to about 35 basis points rise in the interest rate.

Other countries, like Norway and Switzerland, are running current account surpluses that exceed 10 of their GDP, but are resisting currency revaluation.

An undervalued currency enables an economy to integrate into the world economy on the basis of strong export performance. It stimulates production (and hence employment), unlike overvaluation, which stimulates consumption.

Moreover, capital inflows increased significantly, owing to real investment opportunities in the high growth economy and the expectation of renminbi revaluation.

Some Chinese are suspicious that the US push for RMB appreciation and financial market liberalization is really an attempt to gain trade advantages and generate profits for American companies while slowing China s economic expansion.

But there is a more fundamental issue the Chinese authorities, in arguing that it was a mistake to allow the yen to appreciate, may be misinterpreting what happened in Japan and thus overestimating the risk posed by currency appreciation.

If a discrete exchange rate appreciation is to be sustained, it must reflect expected monetary policies tight money and deflation in the appreciated country, and easy money with inflation in the depreciated country. But domestic money growth in China s immature bank based capital market is high and unpredictable, while many interest rates remain officially pegged.

The European Central Bank is staying calm for the moment, but it, too, is probably holding back on interest rate hikes partly out of fear of driving the euro, already at record levels, even higher.

Unlike Japan, which was pressured by the West into a large yen revaluation in 1985 (the Plaza Accord ), the Chinese have opted to move gradually and deliberately.

After all, as the Chinese leadership knows, only continued strong growth will provide the government with the wriggle room it needs to begin to revalue the renminbi.

But whether renminbi appreciation will work depends on reducing China s net capital inflows and current account surplus.

On the surface, at least, the mini revaluation hardly seems to have compromised China s ability to bend exchange markets to its will. Foreign experts had warned that a small Yuan appreciation might be worse than none.