The most consequential relationship in the world today is between the U.S. and China. There has been friction, notably over exchange rates. But from an economic point of view, this needn't be a win-lose battle. A gradually appreciating yuan will encourage Chinese export industries to restructure and upgrade, help distribute the gains from growth more broadly beyond exports to the rest of the economy, and mitigate inflation, which is a growing problem. At the same time, a stronger yuan will help ease political pressures in the U.S. and defuse tensions in the relationship. The Chinese are aware of foreign perceptions that with growing strength it has become more assertive. China's leaders have emphasized that the country is committed to peaceful development. No less than the U.S. or other democracies, China has its own domestic politics that it can't ignore. China's leaders need to explain this reality, and their basic thinking, convincingly to international audiences.
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