Under Pressure【Ａｐｐｒｅｃｉａｔｉｏｎ　Ｕｎｄｅｒ　Ｐｒｅｓｓｕｒｅ】

　　As the yuan appreciates against the dollar, Ba Shusong, Deputy Director of the Financial Research Institute under the Development Research Center of the State Council, a government think tank, casts some light on the underlying reason for the trend--there simply are too many greenbacks. The following is an excerpt of his article titled “The Dollar Is Like a ‘Spoiled Child,’” originally published in the People’s Daily Overseas Edition.
　　The Chinese yuan traded below 8 against the U.S. dollar for the first time on May 15, hitting an all-time high of 7.9982 since its reevaluation on July 21 last year. Clearly, it is an important symbol of the increasing flexibility of the exchange rate regime of the Chinese currency.
　　However, people should not ignore the fact that while China is rapidly advancing the reform of the RMB exchange rate regime and actively reducing trade imbalances with some major trading partners through expanding domestic demand, the dollar continues to act like a “spoiled child” within the international financial system, unwilling to be responsible for its dominant reserve status in the system, for its excessive issuance and for Americans’ low savings rate. All the U.S. side expects is to let developing countries like China assume the consequences of the economic imbalances, just as it did in dealing with the Japanese yen in the last century.
　　Excessive issuance of the greenback has led to excess liquidity in the global economy and served as the macro background of the appreciation of the yuan. To observe the exchange rate curve of the yuan against the dollar, one must first study the dollar trend.
　　From 2001 onward, in order to hedge the technology bubble and the negative economic impacts of the September 11 terrorist attacks, the U.S. Federal Reserve adopted a loose monetary policy, lowering its benchmark interest rate to 1 percent and maintaining that for a three-year period. Given this, the Japanese central bank also implemented an ultra-loose monetary policy and lowered its interest rate to zero in order to fight long-term deflation and economic recession.
　　In recent years, central banks of Britain, the United States and the EU have begun to increase interest rates. The Japanese central bank has recently ended its four-year expansionary monetary policy in an attempt to tighten excess liquidity. In spite of these moves, the overall pattern of an ultra-loose monetary environment still persists.
　　As the United States issues too many dollars, some Asian countries, with China as a representative, accumulate this kind of “junk currency” that is continuously declining in purchasing power through large-scale exports. This is unfair to these countries.
　　The global economic imbalances are affecting the worldwide capital flow. In 2005, the U.S. current account deficits amounted to over $800 billion, while the surplus of Europe, Japan, oil-exporting countries and some emerging Asian economies increased. The huge current account deficits of the United States and its rapidly growing debts have gradually damaged the confidence of foreign investors. International investors believe that a long-term depreciation of the dollar is inevitable, a trend that will heighten the exchange rate risks of dollar-denominated assets.
　　Meanwhile, the United States is at the end of its interest rate hike cycle. But other countries and regions such as Japan, the eurozone countries and China are accelerating their economic recovery and are therefore right at the initial stage of an interest rate hike cycle. The gap of investment returns between dollar-denominated assets and the assets in other countries and regions is expected to narrow.
　　Under such circumstances, the investment attractiveness of dollar-denominated assets relative to assets in other countries and regions has evidently weakened, leading to a gradual shift of global capital from focusing on dollar-denominated assets to assets with higher rates of return and smaller exchange rate risks in Asia and other emerging regions. This is why the stock markets in countries and regions such as Japan, India, Hong Kong, Brazil and China remain bullish. The trend has given rise to ample liquidity in these economies, a situation that is not to be reversed in the short term. As a result, pressure upon their currencies to appreciate is bound to be more intense.
　　

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