Before answering these questions, it is worth discussing how we got to this point and why a weak yuan affects global recovery prospects in the first place.

The price of a country's exports in foreign markets is largely determined by the value of its currency. The lower the value of the currency, the cheaper and more attractive a country's goods are abroad, with the opposite true as currency values increase.

Although the value of the yuan has long been pegged to the U.S. dollar (USD), the managed rate has fluctuated significantly over time -- from as high as 1.5 yuan per USD in the early 1980s to as low as 8.6 yuan per USD in the mid-1990s, when Beijing was trying to fuel its export boom. In July 2005, China lifted its peg, then around 8.3 yuan per USD, allowing its currency to "float" within a specific range determined by the central bank.

Officially, this "managed float" is still Chinese policy. However, since July 2008, when the global financial crisis began to unfold, Beijing has implemented a de facto peg, holding the yuan's value at roughly 6.8 per USD.

The artificially low exchange rate, combined with the dollar's decline over the past year, has proven to be a major obstacle to recovery for the world's major developed economies. European economies, especially France, have been particularly hard-hit, due to the Euro's increase in value against the dollar, and thus also the yuan.

Developing economies are no different. As near-zero U.S. interest rates send investors looking for bigger returns in emerging markets, the resulting capital inflows have driven up those countries' currency values. Consequently, their goods have also become less competitive vis-à-vis Chinese exports. This has forced some emerging economies, including Brazil, Russia, and Taiwan, to tax or place restrictions on inflows in order to slow their currencies' appreciation and maintain trade competitiveness.

Leaders of the industrial economies have increasingly raised the tone of their criticisms. Earlier this month, French President Nicolas Sarkozy declared that "the monetary disorder has become unacceptable." Soon thereafter, the European Union's trade commissioner designate, Karel de Gucht, dubbed the undervalued yuan a "major problem" for global recovery. And President Barack Obama, during his visit to China last November, openly called for Beijing to revalue.

Beijing continues to resist such criticisms, arguing that a stable yuan is important for both China's development and the world economy.

Nevertheless, the tough talk could culminate next month at the G-7 finance ministers' meeting in Canada. Canadian Finance Minister Jim Flaherty has already acknowledged that the issue of instability in foreign exchange markets will be on the meeting's agenda. The discussion is also likely to carry over into the G-8 and G-20 meetings that will follow.

But what tools does the world really have at its disposal to influence Beijing's monetary policy?

One option is simply more of the same: tough talk and diplomacy. The G-7 could issue a communiqué strongly encouraging China to be a responsible economic partner and revalue its currency. But months of this approach have proven to be utterly futile, and any statement from the G-7 grouping would carry little weight or legitimacy, given the G-20's rise to prominence since the financial crisis began.

A second option would be for the group to agree to file a formal complaint against China in the World Trade Organization (WTO), as proposed by economists Aaditya Mattoo and Arvind Subramanian (.pdf). Because the WTO's effective enforcement mechanism could pave the way for collective trade restrictions against the world's second-largest economy, just the prospect of a ruling against China would place direct pressure on Beijing to consider revaluation.

However, it could also be interpreted by China as a hostile act on the part of the industrial world. Given recent dust-ups between the U.S. and China -- including tire tariffs, Taiwan military sales, and the Google cyber-attack, the Obama administration may be reluctant to back such a move at this time.

There is another option, though: to do nothing. While this may seem like no option at all, it is becoming increasingly likely that China will choose to revalue on its own volition. Why?

First, if the financial crisis revealed anything to Chinese policymakers, it was that an export-led growth strategy cannot continue indefinitely, because when developed economies stagnate, markets for Chinese goods dry up. Last year, millions of Chinese migrants who had come to coastal cities seeking jobs were forced to pack up and return to the countryside. Such displacements can lead to domestic political tensions that the regime fears far more than declining export competitiveness. Revaluing the yuan would lead to increased domestic consumption of domestic products, thereby insulating the Chinese economy from such external vulnerabilities.

Second, China is now facing inflation risks. As investment capital continues to pour into the country, the central bank is forced to buy up the foreign currencies in order to maintain its peg. The yuan that are thereby injected into the Chinese banking system are, in turn, loaned out, heating up the economy. Revaluing as a way to mitigate the inflation threat is an option gaining traction within China.

The G-7 may still find it tempting to make yuan appreciation a trade issue. But it would do better to sit back and wait for Beijing to realize that revaluation is in its own best interest.

**Daniel McDowell is a Ph.D. candidate in International Relations at the University of Virginia, specializing in International Political Economy.