On this page (July 24-30) I defended the firm Chinese stance against revaluing the renminbi. The core of my argument was that an international exchange rate rebalancing at this stage would tend to encourage those nations with the worst recent records of economic reform, at the expense of the most resolute reformers, with China in the vanguard.

In response, Andrew Schroter, from New Jersey in the US, wrote a interesting letter (July 31 - August 1) supporting the case for a stronger renminbi. While Mr. Schroter's assertion China is itself seeking to avoid "painful economic reforms" seems wildly at variance with the facts here on the ground (I would advise him to take a visit to the country, if he has not already done so), the overall position he takes deserves a to be seriously addressed.

Mr. Schroter's case rests on a respect for market forces, and is for that reason attractive to classical liberals (such as myself). He correctly points out that every artificial restraint upon free market pricing will have certain perverse consequences which can be reliably expected to prove economically damaging in the long term.

Yet it is misleading to take exchange rate policy in isolation, abstracted from the wider sphere of economic processes.

Firstly, as even the venerable "Economist" magazine has recently conceded, premature liberalization of international capital flows can gravely compromise the progress of economic restructuring at a more basic level. The clear priority for developing countries is to proceed rapidly with the liberalization of trade flows and domestic markets, while promoting small and medium sized enterprises, downsizing the State sector and restructuring domestic financial systems.

Complicating these urgent tasks by introducing volatile currency movements and "hot" international capital flows is in no one's ultimate interest. The traditional Chinese virtue of patience is especially wise in this regard.

Secondly, the conversion of trade and exchange rate issues into diplomatic problems is itself worrying and economically mistaken, since every country reaps the consequences of its own policies in these areas. To talk of any country "beggaring its neighbours" - to use Mr. Schroter's term - is to imply, conversely, that free trade is a political concession of some kind, rather than an intrinsically advantageous position for any nation to adopt, even unilaterally.

The mercantilist myth that market opening is a gift to foreigners, to be granted grudgingly, is supported by a false analysis of the US trade deficit.

As long as US voters tolerate agricultural subsidies, corporate welfare and other types of politically motivated wasteful expenditure - "pork" (which quite naturally they refuse to pay for with higher taxes), then somebody else will need to cover the difference by accumulating US dollars. The Chinese are doing that now.

Hopefully, US citizens will eventually summon the political will to scale down their resurgent "big government" and increase the domestic saving rate, while the Chinese will decide they have better investment and consumption opportunities at home and keep their savings in renminbi.

These decisions will eliminate the imbalance automatically. starcomment@yahoo.com