Regional Asian central banks have swiftly intervened to prevent the appreciation of their currencies, fanning tensions in an already heated global currency discussion. But the use of currency depreciation to revive exports only serves to introduce greater uncertainty and puts economies on a path toward weak recovery.

The stimulation of exports to promote economic growth remains an essential pattern of growth for countries around the world. Because of this, several economies have made reciprocal moves to depreciate their currencies. And yet with so many central banks echoing similar stances, one has to ask what currencies will be spared from these measures.

But beyond this, it's important to examine the root premise of these actions. Much has been made of China's currency exchange policies. At the issue's core, I believe that the yuan should be revalued – further downward in relation to the dollar.

Firstly, let's look at the money supply of the yuan and dollar. In last two years, China implemented a very loose monetary policy. According to quantity of money theory, the value of a currency is inversely proportional to the quantity of money in circulation. If a central bank doubles the amount of money in circulation, the unit value of the currency should be halved.

Comparison between U.S. and China from January 2008 to June 2010

In China,M2money growth was 61 percent from January 2008 to June 2010. And M2 of the dollar grew at 14 percent during the same period. Why should a currency appreciate when it is being printed in faster speed than another one? It is true that China'sGDPgrew faster than the U.S. GDP.

But even after adjusting for GDP growth, the spread between M2 growth and GDP in China was 42 percent, versus the spread of 19 percent in US. Using this measure, shouldn't the yuan be devalued by 23 percent relative to the dollar?

The exchange rate of the yuan to the dollar was adjusted from 7.3 yuan : US$ 1 in January 2008 to 6.7 yuan : US$ 1 in Oct 2010. This adjustment was strange because it did not account for China's monetary policy.

And secondly, let's find out how the exchange rate is determined. The factoring in of purchasing power parity says that same foreign goods and services should be traded at the same value, excluding transportation costs and assuming goods are freely traded. The exchange rate is the ratio of the price in two countries for the same item of goods. Between the yuan and dollar, we can calculate the fair of yuan/dollar exchange based on a basket of goods that are priced in yuan versus the same basket of goods priced in dollars.

Exchange rate of yuan/dollar = yuan price/dollar price

If a bag of potatoes sells for 1 dollar, and same bag of potatoes sells for 7 yuan, the "fair" exchange rate is 7:1 yuan, or 7 yuan: 1 dollar.

The IMF's Managing Director Dominique Strauss-Kahn, has recently said that the yuan is "significantly undervalued" and it is in Beijing's best interest to have a less rigid foreign exchange policy. To conduct a fair valuation of two currencies, economists need to create a basket of goods that is big enough and representative enough of two countries. I do not know what are included in the baskets of goods IMF used for calculation. That basket is a dark box to the public.

Let me present two examples that tell a different story:

● The average BMW 3 series sells for US$ 45,000, and for 480,000 yuan in Beijing. The fair exchange rate is 480K/45K=11 yuan/dollar. On this basis, the yuan is 55 percent over-valued based on a BMW car!

● One pint of Ben & Jerry's chocolate ice cream sells for 60 yuan in Beijing, and US$ 3.89 in New York. Nominal exchange rates are 60/3.89=15 yuan/dollar. Versus the nominal exchange rate of 6.85, the yuan is 150 percent of over-valued based on ice cream!

Many identical goods and services are more expensive in Beijing than in New York.

Besides ice cream and cars, the calculating the real exchange rate would require the inclusion of many other types of goods and services. But the items that are included in the basket, and how the sampling is drawn – can all be easily contested. The calculation of a fair exchange rate based on a PPP that economists from both sides of the Pacific can agree upon is really anyone's game.

Government interventions bring unnecessary deadlock on an issue that could easily be solved in the marketplace. The best mechanism to determine exchange rate policy is for the market to decide by supply and demand.

However, in an era of greater regulation and intervention, it seems we will only have to sit through more squabbling between various governments.

The author is a member of Yale Club of Beijing Yale Club of Beijing