Chinese fire drill: forget tinkering with the renminbi's dollar peg. The key is to increase consumption.

• Author: Wolf, Charles, Jr.

A strident chorus has lately attacked China's stubborn adherence to its policy of maintaining a narrowly-controlled renminbi peg to the U.S. dollar. The chorus includes senior U.S. government officials, politicians turned economists, economists turned political scientists, and political scientists turned financial experts. The choral theme proclaims that appreciation of me renminbi by perhaps 20 percent to 40 percent is essential for good things to happen and bad consequences to be avoided. The narrow band within which China has announced it will allow the peg to fluctuate is said to be drastically insufficient. "It's time to get tough with China," goes the choral refrain.

Most of this flies in the face of basic economics. It also ignores an inevitable question that, although rarely asked, is one whose answer, unlike currency revaluation, could indeed contribute to making things better all around.

The basic economics that the chorus ignores resides in an inexorable accounting identity: namely, the difference between an economy's (in this instance, China's) aggregate domestic savings and its aggregate investment must equal the difference between its international earnings and its international payments (that is, China's current account surplus). Put simply, a country's excess savings are inextricably linked to an equivalent excess of its international earnings from exports and other sources over its international payments for imports and other obligations. China's aggregate savings at about 45 percent of GDP exceed aggregate investment by perhaps 10 percent of GDP.

The inevitable question that needs to be asked is why doesn't China's leadership--the political bureau of the standing committee (PBSC) of the Communist party, and the State Council of the Chinese government--move aggressively to boost domestic consumption, thereby changing the parameters of the accounting equation, enhancing the government's popular appeal, complying with China's formal commitment to "rebalance" its international accounts, and modestly shrinking China's current account surplus?

Movement in this direction will benefit China and its trading partners (including the United States), while appreciation of the renminbi will not.

Although the call for revaluing the renminbi is misguided, it seems at first glance to make sense. If the renminbi were revalued from [yen] 6.8 per U.S. dollar to, say, [yen] 5 per dollar, the renminbi prices of Chinese imports from the United...