Nearly five years have passed since China adopted a more flexible exchange rate regime in July 2005.
Since then the yuan has appreciated about 20 percent against the dollar.
Largely due to that, China saw large sums of international capital inflows and abundant liquidity, the "dual surpluses" of international balance of payments, as well as rising foreign exchange reserves.
Seventy percent of China's $2.5 trillion foreign exchange reserves were generated during the past five years. A one percentage point appreciation of the yuan against the dollar will attract about $5 billion in capital inflows per month, according to studies based on data between 2006 and 2009.
Again, China is facing pressure from the United States and other countries to let the yuan rise, but no one has provided persuasive evidence on the alleged undervaluation of the currency.
Goldman Sachs' model showed the yuan was undervalued by about 20 percent five years ago but it has approached a reasonable level through previous appreciation.
However, an exchange rate regime lacking flexibility and solely fixed to the dollar was not in line with the purpose of China's exchange rate regime reform.
As soon as the external clamor fades away, the reform of Chinese currency is likely to restart and the yuan may move up again in the context of China's economic growth.
Though Japan suffered a lot from a big surge in the yen in the 1980s, some still call for a one-off appreciation of the yuan. It would be very dangerous if such a view influences policymakers.
Given the high capital inflows in China, a major exchange rate move of above 10 percent will lead to a large proportion of international capital quickly flowing out to profit from the currency gain.
The move will cause unusual fluctuations in China's capital and property markets, damaging the health of China's economy.
Expectations are growing stronger for yuan appreciation and international capital inflows are likely to move faster. The currency rate should remain relatively stable for a period while a small and gradual appreciation is in line with China's industrial and economic situation.
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