Stable exchange rate matters
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However, as a currency whose exchange rate has just broken away from a planned economic era and begun to succumb to a market-based system, the establishment of such a mechanism should be based on some well-designed institutional arrangements. It should also be a gradual and long-term process.
As an emerging economy with fledgling market rules, it is impossible and also impractical for China to put in place an exchange rate formation mechanism like how developed countries do.
Developed countries also remain impotent to iron out many shortcomings and defects existing in their monetary policies, which leave much room for artificial manipulations on this score.
Having turned a blind eye to their own exchange rate problems, it is unreasonable for developed countries to pressure China to reform the yuan's exchange rate regime completely in line with the market rate mechanism.
The central bank's stance that there is no basis for drastic fluctuation and changes to the yuan's exchange rate is praiseworthy. However, such a statement alone is by no means enough.
The renminbi exchange rate issue should be resolved not only according to market principles, but also in line with China's national interests. The reason why the US has long pressured China to appreciate the value of its currency, sometimes in a coercive tone, is to safeguard its own interests.
As a leading world currency, the dollar should undertake its just responsibilities in maintaining the stability of the international financial market. The dollar's dominant status has also brought the US huge gains. China's policy of pegging the yuan to the dollar is completely a kind of market behavior under the current financial situation at home and abroad.
China's promise to further push for the reform of the yuan's exchange rate formation mechanism and increase its flexibility serves as an important tool to make the exchange rate more market oriented.
But that does not mean the yuan would be revalued or that the currency will appreciate as rapidly as it did during 2005 to 2007. Under the current economic environment, what China should pursue is not only global economic recovery, but also a stable exchange rate in order to maintain sustainable development of its national economy.
A stable exchange rate will not only serve the Chinese economy but also that of the whole world. The Chinese government should try to resist any pressure from overseas on the yuan's exchange rate and prevent any fast revaluation of its currency.
The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.
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