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Will China liberalize the yuan this year?

`Setting aside basic theories, everyone is clear that the fluctuation of the yuan is not just an economic issue, but also a political one.'

With little regard for Chinese customs, US President George W. Bush criticized China in a speech at a community school in Ohio State on Jan. 21, the first day of the Lunar New Year holidays. Bush reiterated the US' pursuit of free trade and demanded that the country's trade partners follow the trade principles of fairness and freedom. He singled out China, which enjoys a massive trade surplus with the US, as an example of a country pursuing unfair trade policies. The main cause of the trade imbalance, he said, was China's policy of keeping the yuan weak against the US dollar.

Bush's accusation reminds many people of a series of measures Beijing took to suppress the yuan from strengthening in the latter half of last year. After some defensive and offensive moves, the official value of the yuan remained unchanged and pegged to the US dollar, but China has also lowered export rebate rates to curb exports and maintain the yuan's value.

However, the pressure on the yuan to appreciate also remains. Many international media forecast at the end of last year that the yuan would appreciate early this year. Will Bush's comments help realize this forecast?

I believe everyone is eager to know the answer to this hotly debated issue. The so-called experts and professionals naturally will not miss this great opportunity to boost their reputation. The problem is: Is there really a standard answer? Who exactly has the power to make this decision? Why does this issue concern people so much?

As China is called the "world's factory," it is easy to understand why the yuan's value is in the international spotlight. Investors from around the world flock to China. Speculators also cast a greedy eye on the prey. China's magnetic pull on global funds offers clear proof of this issue's importance.

From the import and export of products to the inflow and outflow of hot money in speculative trading, everything is affected by the yuan's value. Any slight change results in enormous gains and losses. The yuan's fluctuation will only become an ever hotter issue as the Chinese economy grows. The likelihood of it triggering a domino effect is more than theoretical. In light of this, maintaining the stability of the yuan is reasonable. How to maintain its stability thus becomes a global issue. But is it possible to reach this goal?

Setting aside basic theories, everyone is clear that the fluctuation of the yuan is not just an economic issue, but also a political one.

Beijing tries to control the market with its "black hand" behind the scenes. This appears to be effective on the surface and in the short term. But in the end market forces will react, as is happening already.

This should be a familiar scene to those who have studied Taiwan's economic development in the 1980s. In 1986 the New Taiwan dollar rose sharply and was liberalized. Could this happen in China this year?

Wu Hui-lin is a research fellow at the Chung Hua Institution for Economic Research.

Translated by Jackie Lin
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