However, there is only a slim possibility that the yuan will be able to maintain its current dynamic appreciation momentum. The yuan is expected to slow its pace of appreciation in the latter half of this year, and will likely stay at 6.10 to 6.15 against the dollar at the end of this year. With a continuing slump in external demand, a continuous rapid rise in the yuan's effective exchange rate will have fierce repercussions for the country's struggling export sector. At a time when there is no big space for domestic investment expansion, exports will be still viewed important to national economic growth. Dampened exports will also add pressures to the already-lackluster domestic employment market.

Recent measures taken by China's central bank to keep its hands away from the yuan's central parity rate are praiseworthy, but questions have been raised over the timing. If the central bank had followed the trend of the yuan's depreciation last year and allowed for its bigger depreciation, there would have been a bigger space for the latest round of appreciation.

Given that the ratio of China's current accounts to its gross domestic product now remains within a reasonable range, a larger range for daily fluctuations of the yuan and reduced interventions into its central parity rate will likely cause excessive adjustments to its exchange rate. To avoid this, the central bank should postpone implementing its plan to expand the range and strengthen management of the yuan's central parity rate.

A series of policies adopted by the Chinese government aimed at strengthening monitoring and management of short-term capital flows, especially capital inflows via trade channels, are expected to slow the pace of speculative capital flows to China in the future.

Despite the substantial progress China has made in reforming the yuan's exchange rate formation mechanism, continuous efforts are still needed, especially efforts to push for marketization of the yuan's benchmark deposit interest rates. A tightened regulation of its benchmark interest rate will hamper the yuan's exchange rate marketization drive.

However, China should continue putting in place moderate capital account regulations before establishing a marketized interest rate and exchange rate mechanism for the yuan, in a bid to avoid repercussions to its economic growth and financial stability caused by possible large-scale short-term capital inflows and outflows.

The author is deputy director of the Institute of World Economics and Politics with the Chinese Academy of Social Sciences.