But would China revalue the renminbi to address other imbalances?

Zhou Xiaochuang, China’s central bank governor, ruled out a revaluation to "to rectify bilateral trade imbalances."

Fine. But China’s overall trade and current account surplus looks set to explode. A $30 billion global trade surplus can be argued away, but not a $100 billion plus surplus. Is he also willing to rule out a revaluation to address a broader set of imbalances?

Zhou, of course, can not say that China is planning to revalue. If China changes its policy, it wants to surprise the market.

However, I don’t quite get China’s emphasis on "flexibility" rather than a "revaluation." I presume the formulation was initially meant to buy China a bit of time: we cannot move towards more exchange rate flexibility safely until we fix the financial system and create a functioning fx market that allows our firms to hedge, and that will take time, so back off ...

But I increasingly suspect that time, rather than making China’s financial system stronger, is making it weaker. Sterilizing $200 b plus of reserves ain’t easy. Check out the PBOC’s balance sheet, and note the huge increase in sterilization paper in 2004. China’s keeps the costs of sterilization down by forcing the (state-owned) banking system to buy low-yielding central bank paper. But how exactly does that make the banking system stronger?

The only reason I can come up with is that China’s banks will ultimately be better off lending to the government at their cost of funds rather than lending to fuel China’s various domestic bubbles, where they ultimately will lose money ...

One other (technical) thought: many emerging economies have gotten into financial trouble by borrowing in dollars to finance domestic projects. If the local currency falls in value, the real value of these dollar debts does up, causing trouble for borrowers and lenders alike. China obviously does not face that risk. But what about the opposite risk, namely borrowing in local currency against dollar or euro export revenues. 35% y/y export growth cannot continue indefinitely, and firms that borrow in renminbi to build export capacity potentially face trouble in the event of a renminbi revaluation. In the short-run, that may argue against any revaluation. But letting the current system run means that the domestic financial system’s renminbi exposure to firms with dollar (and euro) revenue will continue to climb. I am not sure this is a real risk, but I am starting to wonder.