Pushing yuan could rock financial stability

• Source: Global Times
• [01:27 November 18 2009]
• Comments

Currency seems to be more of a political issue than an economic one, especially when it comes to the Chinese yuan.

Speculation mounts whenever there is growing pressure for the yuan to appreciate. The huge inflow of "hot money" to China, totaling $219 billion in the past seven months, according to the latest statistics released by the People's Bank of China, illustrates how much pressure China has been under to revalue its currency. To some Westerners, the appreciation of the yuan is the key to solving the prickly problem of global trade imbalance.

But China has decided to resist the pressure. What the spokesman of China's Ministry of Commerce said Monday has helped cool the fevered pitch: The yuan exchange rate, not related to trade imbalance, should be kept stable, and the calls for the yuan to appreciate are unfair as other currencies are weakening.

Despite sounding like a warning issued to speculators, what the Ministry of Commerce reiterated is the government's long-held currency policy. China saw its currency appreciate roughly 21 percent between 2005 and 2008, and the pace of appreciation has always been adjusted to match its domestic economic conditions.

With the world economy at a critical juncture now, the mounting pressure on the yuan will not mitigate the trade imbalance, but could open the floodgates instead.