China's trade surplus with Europe increased by $24 billion in September resulting in overall increase of 69 per cent to $185.65bn for the first nine months of the year, surpassing the amount for the whole of 2006. This has further intensified the debate on China's currency regime and the 13-nation Eurozone’s ministers broke new ground this week with a statement that identified the RMB’s level as a greater source of concern to Europe than the dollar or the Japanese yen.
Many economists and politicians (especially from US) have argued that China should revalue its currency based on underlying economic fundamentals however on the same hand they have forgotten that China is parking its excess surplus in cheap US treasuries hence providing liquidity to US market. If the liquidity dries up then it will lead to further slowdown in US which is already tottering in sub-prime crisis.
From China's point of view, they cannot appreciate RMB because their financial institutions are under-developed. If the economy is opened or the floating rate exchange regime is followed then it is expected that RMB will appreciate. It is feared that if the exchange is market determined it might result in huge capital outflows because the returns on domestic bills and bonds is low.
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