International pressure is mounting on China to let its currency appreciate. Beijing seems to have no choice but to respond one way or another. The prevailing belief in the United States and Europe as well as in Japan is that the yuan is undervalued in light of China's rapidly increasing economic strength. The country's foreign exchange reserves -- hard currency earned from its booming exports -- are already the second-largest in the world after Japan's.
China's currency has been pegged at a fixed rate of 8.27-28 yuan to the dollar since the autumn of 1997. Ostensibly, though, it maintains a managed floating-rate system. During the Asian financial crisis that broke in mid-1997, when a wave of currency devaluations were triggered in Thailand, Indonesia and other countries in the region, China stood above the fray, refusing to devalue its currency.
That was more than five years ago. Times have changed. Now Beijing is coming under increasing pressure to revise the exchange rate upward. In mid-June, U.S. Treasury Secretary John Snow expressed hope that China would drop the currency peg, saying he was "encouraged" by Chinese moves toward setting a flexible, market-linked exchange rate.
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