In the first three quarters of this year, and especially since mid-late July, the spot exchange rate of the yuan experienced a reversal from continously dropping to slowly appreciating. In October, the spot rate and the central parity rates of the yuan kept surging, and especially at the end of the month, the spot exchange rate of the yuan against the U.S. dollar touched the upper limit of the daily floating range for several days in a row, hitting a record high since the 1994 yuan exchange rate reform.

Nevertheless, continuous appreciation of the yuan is not sustainable given that China's economic fundamentals have remained unchanged.

The soaring yuan is as a result of easy liquidity across the globe. Since the third quarter, a deteriorating sovereign debt crisis in combination with stagnant economic growth or even recession have forced nations back to a policy of maintaining growth.

According to studies by Morgan Stanley, 16 out of 33 central banks have adopted easing measures; 7 out of 10 developed economies resorted to easy money policies; 9 out of 23 major emerging countries implement loose monetary policies like lowering their benchmark interest rates or reserve requirement ratios. In the face of mounting debt, the central banks of developed countries elbow for an edge in a contest of quantitative easing.

In contrast to these unconventional monetary policies favored by major economies, the People's Bank of China has frequently injected liquidity into the market through "reverse repos," resulting in higher benchmark interest rates in China than in the United States.

Such a gap leaves large arbitrage space for offshore funds to tap into, stimulating the backflow of overseas yuan funds.

Central banks across the world currently hold assets worth of $18 trillion, accounting for 30 percent of the global GDP, two times as much as the level 10 years ago.

Despite a relative surplus of global liquidity, there is still a long way to go in "de-leveraging" and "eliminating debts."

Meanwhile, the financing gap of the U.S. dollar remains large. According to calculations from the Bank for International Settlements, the euro zone sovereign debt crisis coupled with the slowdown of the global economy have raised the demand of the U.S. dollar for averting risks, and by the second quarter this year, the demand for the U.S. dollar had reached its highest level since 1999, enlarging the gap to $2 trillion, five times as much as that in 2008. Pressure for a credit squeeze is common in the entire global financial system.

One uncertainty that affects the global exchange rates is the approaching U.S. fiscal cliff. When the U.S. general election wraps up, the U.S. Congress will have seven weeks to tackle problems deriving from its fiscal uncertainty.

Even if a compromise is reached between the Democrats and Republicans, it's unlikely to be sufficient to tackle the country's fiscal cliff in the short run. Once risk events break out, the U.S. dollar will again assume the role as a shelter currency, and then the appreciation of the yuan will be reversed.

Moreover, in terms of purchasing power parity and productivity, the yuan is now floating in the range of an equilibrium rate of exchange; China's international trade balance is at an equilibrium level; and the economy's endurance for a rising yuan is limited. In this sense, it seems difficult for the yuan to continue appreciating.

This is an edited excerpt of an article by Zhang Monan, an associate researcher with the State Information Center, published in the Economic Information Daily