China should adjust its exchange rate policies to improve its prospects for domestic financial reform, domestic macroeconomic stability, open market access for its exports, and a healthy, sustainable rate of economic growth. China's currency, the renminbi, is now significantly undervalued, and China has been manipulating its currency contrary to IMF rules of the game. Not only would an appreciation of the renminbi be in China's own interest, it would also be in the interest of the international community. China should undertake a two-step reform. Step one, to be implemented immediately, would involve simultaneously a switch from a unitary peg to the dollar to a basket peg, a 15 to 25 percent appreciation of the renminbi, and wider margins around the new peg. Step two, to be implemented later, when China's banking system is stronger than it is today, would involve a transition to a managed float, along with a significant liberalization of China's capital outflows.