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June 2010
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Beijing resumed Yuan’s appreciation

Just a couple of days after Beijing announced its decision to make Yuan more flexible, Yuan against US dollar started to appreciate, rising from 6.83 to 6.79. This has been the first move of Chinese currency since 2008, when the world economy fell into recession. 

Looks like China is betting on using exchange rate to control for its overheated domestic economy. Higher exchange rate of RMB also makes imports cheaper, exports more expensive, both are in line with China's gradual shift into more-consumption based economy.

Here is a piece from WSJ commenting on China's recent move. According to the Journal, the recent move is a "chess-master move".

In the never-ending game over China's currency, Beijing has made what chess commentators might term a sharp move.

By unexpectedly announcing it will allow greater exchange-rate flexibility, without specifics on how far or fast the yuan might rise against the U.S. dollar, Beijing has achieved some positive ends for itself.

The move should soften criticism of its exchange-rate policy at the meeting of Group of 20 developing and industrialized nations June 26-27, which had been shaping up as a China-bashing forum.

Yet, by returning the yuan to a managed float against a basket of currencies, Beijing won't have to cede too much in the near term when it comes to the bilateral dollar/yuan rate. The euro's weakness—the yuan is up 14% against the euro this year—should mitigate the speed of any yuan appreciation against the dollar.

Allowing some rise in the yuan's value against the greenback will help the central bank battle inflation, which tipped over the government's target rate for 2010 in May. In the longer term, China's gradual move to a market-based currency regime will help the country pursue more independent monetary policy.

There are downsides for China, of course. By telegraphing revaluation plans, it risks encouraging speculative inflows into the country, complicating efforts to control money supply.

The return to a managed float could also be seen internally as China caving to international pressure. In recent weeks, Brazil and India have joined U.S. calls for China to move on its currency. And Asia's exporters will be relieved to see the yuan rise.

Overall, though, this move scores Beijing some points without causing it too many sacrifices. The game's next developments will depend on the patience of the U.S. if the yuan's resumed rise proves all-too gradual.


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