Since late June, when Beijing reintroduced a floating exchange rate for the yuan, the latter has appreciated about 70 points against the US dollar. While many welcomed an end to the renminbi peg against the dollar, with Western economies being particularly appreciative of this, the said end came at the cost of domestic exporters and manufacturers. It is thus no surprise that the People's Bank of China (PBoC) is now trying to restrain the pace of revaluation to minimize its negative impact on exports.

The renminbi is gradually raising its global status. Given this fact, Beijing should consider very carefully the development of an optimal exchange mechanism, before the yuan is internationalized. On July 22 Wang Yong, a professor at a training academy sponsored by the PBoC, suggested the following in a Shanghai Securities News article: China should expand the renminbi daily trading band from 0.5 percent to one percent in May 2011, and two percent after 2015, to increase exchange flexibility, and to minimize the PBoC's intervention on the exchange rate.

The renminbi daily trading band was set at 0.3 percent when the floating exchange rate was first introduced in 1994. It was expanded to 0.5 percent in May 2007 to allow greater daily fluctuation. Wang's suggestion supports the PBoC, in that it advises the bank to devise a mechanism that helps stabilize the exchange rate, which would be determined by market supply and demand.

The PBoC, which has been committed to supporting a stable, long-term floating exchange rate, has rejected the possibility of a hurried renminbi revaluation. However, even with the expansion of the daily trading band, market players should not see the increment as a signal of rapid renminbi appreciation, because a joint floating rate system guides the whole process.

The Plaza Accord of 1985 and the subsequent rise of the Japanese yen resulted in disastrous shocks to Japan's export-dependent economy. The phenomenon altered the country's economic structure, contributing to the growth and plunge of property and stock markets. Nations should take citizen interest into account when they design policies that apply to currency. I believe that a rapid renminbi appreciation could hurt exporters, who are now dealing with increased labor costs.

Rigid exchange rate regimes have proven to be fragile and tenuous, especially during times of financial crisis. However, we should not hope for a free-floating renminbi, before the currency can be freely exchanged in open markets. The road to renminbi reform will not be easy, particularly in today's treacherous financial jungle. The PBoC should, as usual, tread carefully to minimize the shock to the country's economic system.

The author is a visiting professor at the Asian International Open University, an International Financial Commentator at NOW Business News Channel and founder of www.wongsir.com.hk.

(HK Edition 07/29/2010 page3)