"In the short term, pressure for yuan appreciation will increase further. The change to the currency regime and the small appreciation of the yuan cannot solve China's economic imbalances and the problems of the economy."Yu was quoted by the China Securities Journal as saying a gradual, controlled appreciation of the yuan in tight ranges could win time for the Chinese economy to adjust. China ditched its peg against the dollar when it revalued and adopted a managed float whereby the yuan's value will be steered in reference to an undisclosed basket of currencies. Zhou Xiaochuan at the weekend called the shift as an "initial adjustment." Comments by Yu suggested that the authorities will put the emphasis on 'managed' rather than 'float'.
"It's not a fixed exchange rate system and it's not completely based on market forces either. Under the new managed floating exchange rate system, the monetary authorities have no clear and committed orbit for the exchange rate."Sun said the new regime gave the authorities latitude to intervene to hold the rate close to the desired path. Yu said the managed float would allow China to contain speculative forces and reduce excessive fluctuations. Non-deliverable forwards, offshore financial instruments used to bet on the direction of the yuan, showed that traders expected the currency to rise to 7.71 per dollar in a year's time. China has capital controls and other policy tools at its disposal allowing the authorities to limit the impact of any "attack" on the economy stemming from currency appreciation and market expectations of a further strengthening. The revaluation could help redress the imbalance in China's foreign trade and improve its terms of trade. China had a trade surplus of $39.7 billion in the first six months of the year. The revaluation would boost domestic demand and give China more leeway to craft its own monetary policy.