Yuan: yielding, but won be bullied

When China allowed a more flexible Yuan in June this year, after some soft pegging against a basket of currencies since mid-2008, its major trading partner, the US, warmly welcomed the move.
However, the US jubilancy was quite short-lived, as, only a few days back, Treasury Secretary Timothy Geithner claimed that his office was not satisfied with the pace of the Yuans appreciation.
International media sources cite that the Yuan appreciation has been around 1.5 percent since June, while economists estimate it to be undervalued by anywhere between 12 to 40 percent.
US officials argue that Chinas exceptionally regulated currency puts pressure on US exports and affects jobs in American manufacturing firms.
However, economists Joseph Francois and Simon J. Evenett indicated on a research-based international media source recently that the majority of Chinas exports to the US are not destined for American consumers, but for firms in the form of components and other unfinished goods.
Thus, since imports from China and elsewhere feed into the overall cost structure of the US economy, US jobs could actually be lost if the Yuan is allowed to appreciate considerably.
The Chinese Finance Ministry is bent upon maintaining the pace of the Yuan appreciation.
Chinese Foreign Ministry spokeswoman, Jiang Yu, was cited on the Reuters as saying, "I want to stress that appreciation of the renminbi would not resolve the problem of the deficit between the US and the China and will not resolve the US domestic unemployment problem."
Chinas current account surplus is also alleged as being imbalanced, relative to the global economy and thus distorting world trade order.
However, the accusations on the Yuans fixed rate stance being responsible for Chinas unbalanced current account do not hold ground empirically. When the Chinese Yuan was allowed to appreciate by 22 percent during mid-2005 and mid-2008, China still recorded a current account surplus hovering around $426.1 billion, nearly 9.6 percent of GDP.
On the flip side, even though the Yuan was still pegged against a basket of currencies at the beginning of 2010, the current account reported a net deficit of $7.24 billion in March 2010, thus proving that a fixed Yuan may not be the reason for Chinas exceptional current account figures.
In spite of this, it will serve well for the Chinese economy to allow the Yuan to appreciate, though at a slow pace. This being so because maintaining a consistent exchange rate is resulting in accumulation of immense foreign reserves by the central bank.
This leads to an increase in base money and consequently monetary expansion and puts the economy at a risk of overheating. A gradual appreciation will perhaps not be a bad idea given this scenario.
Further, given a globalised economy that countries function under, China cannot completely resist pressure from its major trading partners.
Those who fear that an appreciation will hurt Chinas export sector, should note that an appreciation can actually give an incentive to exporters for industrial and product upgradation when the support of an undervalued currency diminishes.
A one-time, sudden appreciation, whether big or small, will not be sustainable for the Chinese economy as it will hurt their exports and employment too drastically.
Thus, the current stance of the Chinese government, of a gradually ascending Yuan, is perhaps optimal as it balances both external and domestic factors.