Although the yuan has surged on several occasions in previous weeks to record highs against the US dollar, the appreciation of the yuan may lead to a flood of hot money into the country.
The yuan's value against the dollar has gone up by about 0.7 percent since the US Federal Reserve launched a third round of quantitative easing (QE3) in mid-September, a development which has encouraged global investors to purchase the yuan with the dollar to invest in China's capital market. Among these investors though are a sizable number of hot money holders who just want to turn a quick profit from the yuan's rise.
Meanwhile, China has also absorbed over 80 percent of the capital which has exited other countries following QE3 as the renminbi continues to strengthen. This flood of cash into the country's financial system will ramp up inflationary pressures and create bubbles within the economy.
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