China and its trading partners agree on the need for an easing of restrictions on exchange of the yuan; the difference of opinion concerns timing. While the US and others want a revaluation sooner rather than later, China has many reasons for delaying. Two of the most substantial are mainland banks' massive bad-loans problem that will require billions of dollars to fix, and a growing unemployment problem that has the capacity to reverse decades of economic progress. Southeast Asia can attest to the folly of developing countries opening their capital markets too rapidly after its 1990s boom-bust cycle, and for this reason a freely trading yuan is likely to be many years away. Even so, we can expect to see China's trading partners keep up the pressure for revaluation, if for no other reason than their domestic political considerations. US Treasury Secretary John Snow is just the latest official to bring the message to China and its Asian neighbours that they must step back and allow their currencies to trade at values determined by markets, not bureaucrats. Not to do so, the thinking goes, would be to take unfair advantage in global trade. China, whose currency trades at around 8.28 yuan to the US dollar, has borne most of the criticism. Much of this criticism makes little sense outside the confines of US domestic politics. American manufacturers' lobby groups, citing job losses at home, are among the loudest in calling for redress. Yet many economists believe that even a revaluation of perhaps 15 per cent will have little effect on current trends. American manufacturing and service jobs will likely continue moving offshore, to places like Mexico and India as well as China, for reasons that include highly competitive labour costs and rapidly improving quality. Paradoxically, currency volatility would probably hurt US interests more: a large percentage of China's exports are produced by US companies which have benefited from the certainty of a fixed exchange rate, while US consumers would inevitably pay more for imported goods. This is not to say that a pegged exchange rate is in China's best interests and should never be changed. Indeed, China is paying high costs at the moment for the rigidity of its currency controls. It is having to pile up large foreign exchange reserves, which could otherwise be used to better effect in the country's development. And it is seeing the resultant yuan liquidity being driven into 'hot' sectors such as property, forcing up asset prices to worrying levels. All of this explains why Mr Snow was given pledges this week that Chinese authorities were taking steps to improve the nation's foreign exchange regime. These include allowing Chinese firms to invest US dollars abroad, and raising the amounts that Chinese individuals may take out of the country. The worry for Beijing is that hot money flows into the country threaten to force the authority's hand. Offshore dollar holdings, held by mainland individuals and firms, are flooding back into the country in expectation of a revaluation. Some economists estimate the amount to be as much as US$30 billion in the first six months of the year. By signalling a willingness to countenance a more flexible regime some time down the track, Beijing has sent a powerful signal of its medium-term intent that will be hard to reverse. This, together with strong direct investment and trade surpluses, is forcing the central bank to mop up the liquidity through massive issuance of bonds. However, such exercises can only be temporary. The markets, as well as Mr Snow, are indicating fundamental reasons for a change in the currency arrangements. Now may not be the right time, but as China is ever more integrated into the world financial system, such pressures cannot be avoided indefinitely.