As China's power rises, one of the sources of contention in Sino-US trade relations is the RMB exchange rate. For a long time, the U.S. has been embroiled in a national debate about the appreciation of the Chinese currency. Most recently, President Barack Obama again sent out strong signals to China over the issue. On Capitol Hill, some congressmen are working hard to label China as a currency manipulator.

The US economic recession and upcoming mid-term elections will keep the currency exchange rate a hot topic in Sino-US trade relations. But most of the discussion of RMB exchange rates is bound up in politics rather than economics.

The Sino-US trade imbalance is relatively simple to understand. The economics of the RMB exchange rate is a bit more difficult. What is noticeable on many occasions is how discussion about the exchange rate is overlaid with political goals sought by those whose words are directed toward gaining votes rather than any real economic concerns, complicating the debate.

Exchange rates can create favorable trade balances, but any exchange rate policy has to be consistent with a nation's currency regime. The RMB is nonconvertible currency and, until it is, a market-oriented RMB exchange rate regime will raise serious questions – not only for China, but also for the fragile international monetary regime.

Theoretically, appreciation of the RMB could improve the US trade deficit with China. But then the American consumer would have to pay more for goods made in China. This leads to the question of whether the US government would be willing to make Americans pay higher prices at this particular time.

It is also questionable whether the U.S. is willing to see a weak dollar in exchange of its trade balance with China. As the most powerful nation in the world, the U.S. has pursued a monetary policy of keeping the US dollar as the dominant world currency, and this will certainly continue to be its political goal regardless of the trade imbalance.

Another issue tied to the question of RMB appreciation is China's portfolio of US treasury bonds. Given the size of its current holdings, the Chinese government will definitely suffer serious losses in the US bond market if the RMB appreciates more. Moreover, Sino-US economic cooperation will suffer an even greater loss, and the U.S. cannot afford to pay this price in light of the growing interdependence of the two countries' economies and the increasing significance of China in world politics. Considering its current huge budget deficits, the US Treasury would not be happy to see China stop buying its bonds.