Yuan appreciation: Currency speculation on the rise

Beijing: Mainland China's communist regime's dogged refusal to alter the exchange rate of its currency, artificially pegged at a fixed rate to the US dollar, may already be inviting the first ripples of speculative action in the currency markets. China's top currency regulator has now said the country is experiencing an increasing flow of speculative capital into the country because of a widening interest-rate differential.

According to Yi Gang, head of the State Administration of Foreign Exchange, the funds are disguised as foreign direct investment and are operating through ''underground money shops.'' Speaking at a media briefing in Beijing today, Gang reiterated the official position that the yuan's exchange rate will be kept stable at a ''reasonable and balanced level.''

In a move, manifestly unfair to other trading nations, China has pegged its currency to the dollar since July 2008. The move is aimed at helping exporters overcome a global recession.

Simultaneously, a massive stimulus programme was generated at home with non-discriminatory lending which has now led to bubble creation in realty and stocks and has increased inflationary pressure.

US manufacturers have argued for long that the yuan is atleast 40 per cent undervalued against the dollar. This has facilitated a massive entry of Chinese goods in the US economy even as it has successfully deterred an equivalent exploitation of Chinese markets by US exporters.

The yuan remained tied to the dollar for decades but under sustained pressure from the then George W Bush administration Beijing tied the yuan to a wider basket of currencies in 2005 and allowed it to appreciate by about 20 per cent through late 2008. The movement was arrested immediately after the global financial crisis hit and recessionary trends around the globe wiped out millions of Chinese jobs.