China's Unfinished Yuan Reform - Further Appreciation Needed to Redress External Imbalances

The Chinese government has been hesitant to revalue the yuan out of concern over the negative impact revaluation would have on the domestic economy. To maintain a stable exchange rate, however, the authorities have had no choice but to tolerate large balance of payment surpluses and a rapid increase in foreign reserves. This has already led to some negative outcomes, including increased trade friction with trading partners and excess liquidity. To redress these external imbalances and regain autonomy in its monetary policy, China needs to move toward a free floating exchange rate system by refraining from intervention and letting the market determine exchange rates