True, the actual appreciation since July 21 of the still tightly controlled renminbi has been trivial—less than 3 percent. And it is much less than the 20 to 25 percent appreciation called for by vociferous American critics of China’s foreign exchange policy. But the move signaled that further appreciations had become more likely in the guise of achieving greater exchange rate flexibility.
American pressure on China today to appreciate the renminbi is eerily similar to American pressure on Japan that began almost 30 years ago to appreciate the yen against the dollar. There are some differences between the two cases, but downward pressure on interest rates from foreign exchange risk could lead China into a zero-interest liquidity trap much like the one Japan has suffered since the mid-1990s.