Wild speculation about a revaluation of the Chinese currency, the yuan or renminbi, is rocking foreign exchange markets around the globe.
Nerves are so strained that a vague, badly-translated article by a China News Service reporter about possible yuan scenarios in the Internet edition of the official People's Daily caused chaos.
The false report about a possible imminent revaluation of the yuan caused billions of dollars to move before the mistake was noticed and the article was removed from the Web site.
Financial markets have been on edge since the US, faced with a trade deficit with China of US$162 billion, increased pressure on Beijing to revalue the yuan or trade more freely.
China's currency has long been pegged to the dollar at a value of 8.277 yuan with fluctuation permitted within a minimal margin of 0.3 percent.
While the yuan's peg proved to be a very important and much-lauded stabilizing factor during the 1997-98 Asian financial crisis, the US has turned it into a bogeyman for its current economic problems.
US industry is suffering under competition from China and accuses Beijing of artificially keeping the yuan low to make its exports cheaper. The decline in the value of the US dollar is the primary factor making imports cheap.
Industry says that 3 million US jobs have been lost because the yuan is undervalued by between 25 and 40 percent. Independent experts place the figure closer to between 5 and 7 percent.
"The US has a few economic problems that they are having some difficulty dealing with, so they are exaggerating the problem," said Zhong Wei from the finance research institute of Beijing Normal University.
The US leadership has been transferring internal political pressure to Beijing, but the specters Washington is calling up may be difficult to control. Experts warn that a fully free flotation of the yuan could have catastrophic consequences.
If the yuan appreciates sharply, China and its Asian neighbors would not buy so many US treasury bonds and finance the massive US budget deficit.
The dollar could fall below the 1.50 barrier with the euro; oil prices could rise above US$70 a barrel, pushing US interest rates into double figures; the US economy would fall into recession, putting the brakes on growth in Europe and Japan.
The situation does not have to be so bad. China proceeds one small step at a time. The first step could be to expand the fluctuation margin. Tying the yuan to a basket of currencies is also planned.
Next week, the yuan is expected to expand its trading relationship from four to 12 currencies.
On a purely technical level, the reforms have been widely successful. Pressure from the US is considered "unhelpful."
Finance Minister Jin Renqing (
Financial researcher Zhong Wei also believes that the effects on trade will not be as great as the US hopes.
China's gross domestic product and trade balance each account for only 5 percent of the global total. China can not correct the temporary imbalances in the world economy, Zhong said.
"I think the EU and the US are overestimating the role that the yuan can play," Zhong said. "Even if we double its value, this cannot solve the economic problems in the US."