China's dramatic growth in exports, its rising conflict with its trade partners over the perceived undervaluation of the renminbi, and the snail's pace of financial liberalization is pushing its bilateral trade and monetary relations to a boil. Discontent in the United States, Japan, Southeast Asia, and, most recently, Brazil, has led popular pundits and even country finance ministers to speak publicly of a "currency war" with many calling for the de-pegging of the renminbi to the dollar and an immediate appreciation of China's currency. However, China's history of liberalization, beginning with the opening to the West in 1978, is well known as one of gradualism in trade and the financial spheres. Economic history is replete with economic crises brought on by too rapid or premature liberalization of countries' capital flows. This article presents the case both for and against capital account liberalization and highlights the risks that China in particular confronts in responding to external demands for greater openness and an appreciation of the renminbi. It clearly captures the tightrope that China must walk between responding to the demands of its trade partners and maintaining economic growth and political stability at home.
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