The Journal of China’s Academy of Social Science, a government think tank, published an article stating that the external appreciation of the RMB might lead to domestic inflation. The Chinese RMB is facing two challenges: one from the international market to appreciate and the other from domestic market to depreciate. There are three reasons. First is that the settlement system for Chinese exports prohibits the free flow of foreign exchange – all exchange earned by exporters must be sold to the State at the official rate. The State has increased the money in circulation by 15,000 bn RMB for the $2,400 bn foreign exchange reserves. Second is that the relaxed monetary policy has led to staggering loans reaching 9,500 bn RMB. Third is that the various bank deposits represent potential purchasing power.
Source: China Review News, April 22, 2010