In 1994, China had pegged its currency yuan at 8.28 to a dollar. Since then it has stuck to this fixed exchange rate despite pressures from US and other countries. The fixed exchange rate suppressed the value of the yuan making Chinese goods globally competitive. This has led to a massive current account surplus and it is estimated that the yuan could be as much as 35-40% undervalued against the US dollar. The Chinese economy has been exportdriven and that is its foundation and strength. The cheap and abundant labor available in the country has taken its manufacturing sector to remarkable heights, which forms the backbone of the economy. This has lured many a foreign corporations to set up their manufacturing units in China and due to this they have been able to export goods at very low prices increasing the country’s exports.

Chinese exports have been giving serious competition to domestic players of various countries. In order to make the domestic goods more attractive compared to the cheap goods exported from China, other countries have been pressurizing China to revalue its currency. Commenting on this, T B Kapali, Associate Vice- President, Treasury, ING Vysya Bank, says, “As one of the biggest national economies and also a very major manufacturing and trading nation, China had to move towards a market structure which is in tune with most of the rest of the world. Obligations under the WTO also would be having some impact in nudging the Chinese towards changes in market structures.”

Though the Chinese Government has repeatedly resisted the pressure to float the currency, it now looks that it has to
float the yuan as China is becoming an important economic power and it knows that it cannot have a system which is totally different from other global partners. Kapali opines, “One can also notice that pressure is building up for formally expanding the G7 to include China (and possibly India also down the line...) along with Russia—which is a dialog partner even now. One cannot think of a G9 grouping with one nation having a totally divergent policy towards market structures, institutions and so on.”