Lessons from Singapore

Singapore revaluation: Singapore might just be a dot on the map, but it has long been viewed as a leader in economic policy by other Asian countries, including China. That's why investors took so much notice when the city-state revalued its currency by about 1.3 percent.

Singapore shifted its currency band to contain imported inflation. This approach is not open to China, whose inflationary pressures are home-grown, and whose exchange rate looks more undervalued. Nevertheless, Beijing can learn from Singapore's model, which offers a better balance between stability and flexibility.

China needs to make its exchange rate less rigid to counter accusations that it has been manipulating the yuan. However, Beijing doesn't want too much currency fluctuation. That's why Singapore's "basket, band and crawl" model might be appealing to leaders in Beijing.

The Singapore dollar is pegged to a trade-weighted basket of currencies, and allowed to fluctuate within a 4 percent band. However, the contents of the basket are a secret, as are the upper and lower limits of the band. Singapore can also move the mid-point of the band, as it did on April 14. This gives its central bank significant discretion in allowing the currency to rise or fall.

Of course, there are huge differences between a city-state and the world's third-largest economy. Singapore, whose foreign trade is three times its GDP, has to allow enough freedom in its exchange rate to achieve domestic price stability. For China, where foreign trade accounts for 50 percent of GDP, that incentive is much smaller.

Moreover, China could not adopt Singapore's approach without a one-time appreciation in its currency. Otherwise, it would be hard to create a two-way trade: China currently restricts the yuan's movement against the dollar to just 0.5 percent every day. Nevertheless, as China considers making its exchange rate more flexible without abandoning stability, the Singaporean model is worth studying.