Over the past decade or so, yuan has been pegged tightly to the dollar. As China strongly believes in its revaluation much of its financial and economic circles would affect the central bankers to initiate efforts in liberalizing their currency efforts. In moving towards a free float of its currency, China is also going to have a look at moving towards a more open, transparent and free market economy.

It would not be wrong to say that the advent of financial liberalization has effectively eroded the hold central bankers hitherto enjoyed over monetary policy. The market mechanism and its `invisible hand' have in quite unmistaken terms signalled that it would have a decisive impact over monetary policy issues hereafter. This is the hallmark of the `new global financial order' that has completely altered the economic and financial landscape throughout the world. Given that exchange rate determination is one of the most vital policy instruments at the disposal of the governments and the central banks to alter the competitive profile of their respective economies, the impact of financial liberalization assumes added importance. The implication here is that the era of `fixed peg' is over and the authorities now resort to `managed floating' of their currencies so that some leeway is given to the concerned authorities to fix their currencies. For instance, the Chinese allowed the yuan to float within a fixed band. They now peg the yuan to a basket of currencies and not to the dollar alone, as had been the practice hitherto. The revaluation of the Renminbi-as the yuan is called-has become a hotly contested debate in the financial and economic circles. This article attempts to analyze the spillover effects of yuan revaluation within a macroeconomic perspectiv.

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